<PAGE>
As filed with the Securities and Exchange Commission on May 29, 1996
1933 Act File No. 2-60491
1940 Act File No. 811-2794
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 22
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 24
MFS SERIES TRUST III
(Exact name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 954-5000
Stephen E. Cavan, Massachusetts Financial Services Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|X| on May 30, 1996 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for
a previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its Shares of Beneficial Interest (without par value), under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice with respect to its fiscal
year ended January 31, 1996 on March 22, 1996.
<PAGE>
MFS SERIES TRUST III
MFS HIGH INCOME FUND
MFS MUNICIPAL HIGH INCOME FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
<S> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial *
Information
(b) * *
(c) Information Concerning *
Shares of the Fund -
Performance Information
(d) Condensed Financial *
Information
4 (a) The Fund; Investment *
Objective and Policies
(b), (c) Investment Objective and *
Policies
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment
Adviser; Back Cover Page
(c), (d) Management of the Fund - *
Investment Adviser
(e) Management of the Fund - *
Shareholder Servicing
Agent; Back Cover Page
(f) Expense Summary; Condensed *
Financial Information
(g) Information Concerning Shares *
of the Fund - Purchases
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares *
of the Fund -Description of
Shares, Voting Rights and
Liabilities; Information
Concerning Shares of the
Fund - Redemptions and
Repurchases; Information
Concerning Shares of the
Fund - Purchases; Information
Concerning Shares of the
Fund - Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Fund - Distributions;
Shareholder Services -
Distribution Options
(g) Information Concerning Shares *
of the Fund - Tax Status;
Information Concerning Shares
of the Fund - Distributions
(h) * *
7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Fund - Purchases; Net
Asset Value
(c) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the
Fund - Purchases
(e) Information Concerning Shares *
of the Fund - Distribution Plans;
Expense Summary
(f) Information Concerning Shares *
of the Fund - Distribution Plans
8 (a) Information Concerning *
Shares of the Fund - Redemptions
and Repurchases; Information
Concerning Shares of the
Fund - Purchases
(b), (c), (d) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
9 * *
<PAGE>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a), (b), (c) * Investment Objective,
Policies and Restrictions
(d) * *
14 (a), (b) * Management of the Fund -
Trustees and Officers
(c) * Management of the Fund -
Trustees and Officers;
Appendix A
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the
Fund - Trustees and
Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Distribution Plans
of the Fund - Distribution
Plans
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover
Page
(i) * Management of the Fund -
Shareholder Servicing
Agent
17 (a), (b), (c), * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Description of Shares,
Shares of the Fund - Voting Rights and
Description of Shares, Liabilities
Voting Rights and Liabilities
(b) * *
19 (a) Information Concerning Shareholder Services
Shares of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Management of the
Shares of the Fund - Fund - Distributor;
Net Asset Value; Determination of Net Asset
Information Concerning Value and Performance
Shares of the Fund - - Net Asset Value
Purchases
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor;
Distribution Plans
22 (a) * *
(b) * Determination of Net Asset
Value and Performance
23 * Independent Auditors and
Financial Statements
- -----------------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE>
PROSPECTUS -- June 1, 1996
Class A Shares of Beneficial Interest
MFS(R) HIGH INCOME FUND Class B Shares of Beneficial Interest
(A Member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- -------------------------------------------------------------------------------
Page
----
1. Expense Summary ................................................... 2
2. The Fund ......................................................... 3
3. Condensed Financial Information ................................... 4
4. Investment Objective and Policies ................................. 6
5. Investment Techniques ............................................. 7
6. Additional Risk Factors ........................................... 13
7. Management of the Fund ........................................... 16
8. Information Concerning Shares of the Fund ........................ 18
Purchases ..................................................... 18
Exchanges ..................................................... 22
Redemptions and Repurchases ................................... 23
Distribution Plans ............................................ 25
Distributions ................................................. 26
Tax Status .................................................... 26
Net Asset Value ............................................... 27
Description of Shares, Voting Rights and Liabilities .......... 27
Performance Information ....................................... 28
9. Shareholder Services .............................................. 28
Appendix A ........................................................ A-1
Appendix B ........................................................ B-1
Appendix C ........................................................ C-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS HIGH INCOME FUND 500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
The investment objective of MFS High Income Fund (the "Fund") is to seek high
current income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity features
(see "Investment Objective and Policies"). The Fund is a diversified series of
MFS Series Trust III (the "Trust"), an open-end investment company. The minimum
initial investment is generally $1,000 per account (see "Information Concerning
Shares of the Fund -- Purchases").
------------------------
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN LOWER-RATED BONDS,
COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT
RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY
CONSIDER THESE RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK FACTORS -- LOWER-
RATED FIXED INCOME SECURITIES").
------------------------
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission a
Statement of Additional Information (the "SAI"), dated June 1, 1996, as amended
or supplemented from time to time, which contains more detailed information
about the Trust and the Fund. The SAI is incorporated into this Prospectus by
reference. See page 30 for a further description of the information set forth in
the SAI. A copy of the SAI may be obtained without charge by contacting the
Shareholder Servicing Agent (see back cover for address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
<TABLE>
<CAPTION>
1. EXPENSE SUMMARY
CLASS A CLASS B CLASS C
SHAREHOLDER TRANSACTION EXPENSES: ------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price) .................. 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) ................................................. See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES OF THE FUND
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ............................................... 0.45% 0.45% 0.45%
Rule 12b-1 Fees ............................................... 0.26%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ............................................. 0.34% 0.40% 0.32%
---- ---- ----
Total Operating Expenses ...................................... 1.05% 1.85% 1.77%
<FN>
- ----------
(1) Purchases of $1 million or more and certain purchases by retirement plans are not subject to an initial
sales charge; however, a contingent deferred sales charge (a "CDSC") of 1% will be imposed on such purchases
in the event of certain redemption transactions within 12 months following such purchases (see "Information
Concerning Shares of the Fund -- Purchases" below).
(2) The Fund has adopted a Distribution Plan for its Class A shares in accordance with Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940 Act") which provides that it will pay distribution/
service fees aggregating up to (but not necessarily all of) 0.35% per annum of the average daily net assets
attributable to the Class A shares. The Fund is currently paying distribution fees in the amount of 0.05%.
Payment of the remaining portion of the 0.10% per annum distribution fee equal to 0.05% per annum will
commence on such date as the Trustees of the Trust may determine. Assets attributable to Class A shares sold
prior to March 1, 1991 are subject to a service fee of 0.15% per annum. Distribution expenses paid under
this Plan, together with the initial sales charge, may cause long-term shareholders to pay more than the
maximum sales charge that would have been permissible if imposed entirely as an initial sales charge. See
"Information Concerning Shares of the Fund -- Distribution Plans" below.
(3) The Fund has adopted separate Distribution Plans for its Class B and its Class C shares in accordance with
Rule 12b-1 under the 1940 Act, which provide that it will pay distribution/service fees aggregating up to
(but not necessarily all of) 1.00% per annum of the average daily net assets attributable to the Class B
shares under the Class B Distribution Plan and the Class C shares under the Class C Distribution Plan. See
"Information Concerning Shares of the Fund -- Distribution Plans" below. Distribution expenses paid under
these Plans, together with any CDSC payable upon redemption of Class B and Class C shares, may cause
long-term shareholders to pay more than the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge.
(4) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of
cash maintained by the Fund with its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the effect of reducing the Fund's
expenses). Any such fee reductions are not reflected under "Other Expenses."
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
- ------ ------- ---------------------- -------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year ......................................... $ 58 $ 59 $ 19 $ 28 $ 18
3 years ........................................ 79 88 58 56 56
5 years ........................................ 103 120 100 96 96
10 years ........................................ 170 196(2) 196(2) 208 208
<FN>
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after purchase; therefore, years nine and ten reflect
Class A expenses.
</TABLE>
The purpose of the expense table is to assist investors in understanding the
various costs and expenses that a shareholder of the Fund will bear directly or
indirectly. More complete descriptions of the following expenses of the Fund are
set forth in the following sections of the Prospectus: (i) varying sales charges
on share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e. distribution
plan) fees -- "Distribution Plans".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1977. The Trust presently consists of two
series, each of which represents a portfolio with separate investment objectives
and policies. Shares of the Fund are continuously sold to the public and the
Fund then uses the proceeds to buy securities (primarily bonds and other fixed
income instruments) for its portfolio. Three classes of shares of the Fund
currently are offered to the general public. Class A shares are offered at net
asset value plus an initial sales charge up to a maximum of 4.75% of the
offering price (or a CDSC upon redemption of 1.00% during the first year in the
case of certain purchases of $1 million or more and certain purchases by
retirement plans) and are subject to an annual distribution fee and service fee
up to a maximum of 0.35% per annum. Class B shares are offered at net asset
value without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and a service fee up to a maximum of 1.00% per annum. Class B
shares will convert to Class A shares approximately eight years after purchase.
Class C shares are offered at net asset value without an initial sales charge
but are subject to a CDSC upon redemption of 1.00% during the first year and an
annual distribution fee and service fee up to a maximum of 1.00% per annum.
Class C shares do not convert to any other class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the assets of the Fund
and the officers of the Trust are responsible for the Fund's operations. The
Adviser manages the portfolio from day to day in accordance with the Fund's
investment objective and policies. A majority of the Trustees are not affiliated
with the Adviser. The selection of investments and the way they are managed
depend on the conditions and trends in the economy and the financial
marketplaces. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at their net asset value, less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with financial statements
included in the Fund's Annual Report to shareholders which are incorporated by
reference into the SAI in reliance upon the report of the Fund's independent
auditors, given upon their authority as experts in accounting and auditing. The
Fund's independent auditors are Deloitte & Touche LLP.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
YEAR ENDED JANUARY 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ........................ $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71
--------- -------- --------- --------- --------
Income from investment operations# --
Net investment income(S) .................................... $ 0.45 $ 0.44 $ 0.40 $ 0.51 $ 0.56
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .............................. 0.39 (0.66) 0.48 0.24 1.21
--------- -------- --------- --------- --------
Total from investment operations .......................... $ 0.84 $ (0.22) $ 0.88 $ 0.75 $ 1.77
--------- -------- --------- --------- --------
Less distributions declared to shareholders --
From net investment income .................................. $ (0.44) $ (0.43) $ (0.42) $ (0.51) $ (0.56)
In excess of net investment income .......................... -- (0.01) (0.07) -- --
From paid-in capital ........................................ -- -- -- (0.02) (0.03)
--------- -------- --------- --------- --------
Total distributions declared to shareholders .............. $ (0.44) $ (0.44) $ (0.49) $ (0.53) $ (0.59)
--------- -------- --------- --------- --------
Net asset value -- end of period .............................. $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89
========= ======== ========= ========= ========
Total return++ .............................................. 17.97% (3.95)% 18.13% 16.36% 49.64%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses ## ................................................. 1.00% 0.99% 1.00% 1.03% 1.10%
Net investment income ....................................... 8.83% 8.65% 8.22% 10.21% 11.59%
PORTFOLIO TURNOVER ............................................ 59% 59% 68% 75% 28%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ................. $ 620 $ 524 $ 645 $ 585 $ 556
<FN>
- ----------
++Total returns for Class A shares do not include the applicable sales charge (except for reinvestment of dividends prior to
March 1, 1991). If the charge had been included, the results would have been lower.
#Per share data for the period subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(S)The distributor waived a portion of its distribution fee for the years indicated. If this fee had been incurred by the
Fund, the net investment income per share and ratios would have been:
Net investment income .................................... -- $ 0.43 $ 0.40 -- --
Ratios (to average net assets):
Expenses ............................................... -- 1.09% 1.04% -- --
Net investment income .................................. -- 8.55% 8.18% -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - continued
YEAR ENDED JANUARY 31,
--------------------------------------------------------------
1991 1990 1989 1988 1987
- --------------------------------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ........................ $ 4.85 $ 6.04 $ 6.17 $ 7.11 $ 7.14
--------- -------- --------- --------- --------
Income from investment operations# --
Net investment income ....................................... $ 0.65 $ 0.69 $ 0.76 $ 0.77 $ 0.93
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .............................. (1.08) (1.13) (0.09) (0.83) 0.07
--------- -------- --------- --------- --------
Total from investment operations .......................... $ (0.43) $ (0.44) $ 0.67 $ (0.06) $ 1.00
--------- -------- --------- --------- --------
Less distributions declared to shareholders --
From net investment income .................................. $ (0.71) $ (0.75) $ (0.75) $ (0.87) $ (0.93)
From net realized gain on investments and foreign currency
transactions ............................................... -- -- (0.05) (0.01) (0.10)
From paid-in capital ........................................ -- -- -- ** -- * --
--------- -------- --------- --------- --------
Total distributions declared to shareholders .............. $ (0.71) $ (0.75) $ (0.80) $ (0.88) $ (1.03)
--------- -------- --------- --------- --------
Net asset value -- end of period .............................. $ 3.71 $ 4.85 $ 6.04 $ 6.17 $ 7.11
========= ======== ========= ========= ========
Total return++ .............................................. (10.99)% (9.18)% 10.68% (1.94)% 14.03%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ## ................................................. 1.05% 0.87% 0.87% 0.75% 0.71%
Net investment income ....................................... 14.97% 12.17% 12.44% 11.49% 12.49%
PORTFOLIO TURNOVER ............................................ 24% 25% 34% 28% 46%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ................. $ 380 $ 574 $ 880 $ 1,001 $ 1,232
<FN>
- ----------
++Total returns for Class A shares do not include the applicable sales charge (except for reinvestment of dividends prior to
March 1, 1991). If the charge had been included, the results would have been lower.
#Per share data for the period subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
*Includes a per share distribution from paid-in capital of $0.0006.
**Includes a per share distribution from paid-in capital of $0.0004.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - continued
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------
1996 1995 1994* 1996 1995 1994**
- --------------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ........................ $ 4.84 $ 5.50 $ 5.27 $ 4.85 $ 5.50 $ 5.41
------- ------- ------- ------- -------- -------
Income from investment operations# --
Net investment income ....................................... $ 0.41 $ 0.39 $ 0.15 $ 0.41 $ 0.41 $ --
Net realized and unrealized gain (loss) on
investments and foreign currency transactions .............. 0.39 (0.65) 0.22 0.39 (0.66) 0.09
------- ------- ------- ------- -------- -------
Total from investment operations .......................... $ 0.80 $ (0.26) $ 0.37 $ 0.80 $ (0.25) $ 0.09
------- ------- ------- ------- -------- -------
Less distributions declared to shareholders --
From net investment income .................................. $ (0.40) $ (0.39) $ (0.13) $ (0.40) $ (0.39) $ -- ++
In excess of net investment income .......................... -- (0.01) (0.01) -- (0.01) -- ++
------- ------- ------- ------- -------- -------
Total distributions declared to
shareholders ............................................. $ (0.40) $ (0.40) $ (0.14) $ (0.40) $ (0.40) $ --
------- ------- ------- ------- -------- -------
Net asset value -- end of period .............................. $ 5.24 $ 4.84 $ 5.50 $ 5.25 $ 4.85 $ 5.50
======= ======= ======= ======= ======== =======
Total return ................................. ................ 16.98% (4.77)% 20.29%+ 17.03% (4.51)% 20.94%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## .................................................. 1.85% 1.85% 1.79%+ 1.77% 1.79% 1.36%+
Net investment income ....................................... 7.99% 7.79% 6.94%+ 8.02% 8.01% 5.92%+
PORTFOLIO TURNOVER ............................................ 59% 59% 68% 59% 59% 68%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ................. $ 283 $ 286 $ 371 $ 16 $ 3 $ 1
<FN>
- ----------
*For the period from the commencement of offering of Class B shares, September 27, 1993 to January 31, 1994.
**For the period from the commencement of offering of Class C shares, January 3, 1994 to January 31, 1994.
+Annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++Includes per share distributions from net investment income and in excess of net investment income of $0.004 and $0.001,
respectively.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of the Fund is to seek high
current income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity features.
Capital growth, if any, is a consideration incidental to the objective of the
Fund of high current income. Any investment involves risk and there can be no
assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES -- Fixed income securities offering the high current income
sought by the Fund normally include those fixed income securities which offer a
current yield above that generally available on debt securities in the three
highest rating categories of the recognized rating agencies (commonly known as
"junk bonds" if rated below the four highest categories of recognized rating
agencies). The Fund may invest up to 100% of its net assets in such securities.
For a description of these rating categories, see Appendix B to this Prospectus,
and Appendix C for a chart showing the Fund's holdings of fixed income
securities broken down by rating category for its fiscal year ended January 31,
1996 (see "Additional Risk Factors -- Lower-Rated Fixed Income Securities"
below.) However, since available yields and yield differentials vary over time,
no specific level of income or yield differential can ever be assured. The
dividends paid by the Fund will increase or decrease in relation to the income
received by the Fund from its investments, which would in any case be reduced by
the expenses of the Fund before such income is distributed to its shareholders.
Fixed income securities include preferred and preference stocks and all types of
debt obligations of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates
(including interests in trusts or other entities representing such obligations),
conditional sales contracts, commercial paper and obligations issued or
guaranteed by the U.S. Government, any foreign government or any of their
respective political subdivisions, agencies or instrumentalities (including
obligations, such as repurchase agreements, secured by such instruments).
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Under normal market conditions, not
more than 25% of the value of the total assets of the Fund will be invested in
equity securities, including common stocks, warrants and rights.
Consistent with its investment objective and policies described above, the Fund
may also invest up to 50% (and generally expects to invest between 0% and 20%)
of its total assets in foreign securities which are not traded on a U.S.
Exchange. The Fund has authority to invest up to 25% of its total assets in
securities issued or guaranteed by foreign governments or their agencies or
instrumentalities. See "Additional Risk Factors -- Foreign Securities" below.
However, the Fund has made commitments to regulatory authorities to limit its
investments in securities issued by any single foreign government to 5% of its
total assets and to continue to maintain its status as a diversified company
under the 1940 Act.
The Fund may invest up to 40% of the value of its total assets in each of the
electric utility and telephone industries, but will not invest more than 25% in
either of those industries unless yields available for four consecutive weeks in
the four highest rating categories on new issue bonds in such industry (issue
size of $50 million or more) have averaged in excess of 105% of yields of new
issue long-term industrial bonds similarly rated (issue size of $50 million or
more) and, in the opinion of the Adviser, the relative return available from the
electric utility or telephone industry and the relative risk, marketability,
quality and availability of securities of such industry justifies such an
investment.
When and if available, fixed income securities may be purchased at a discount
from face value. However, the Fund does not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive. From time to time the Fund may
purchase securities not paying interest at the time acquired if, in the opinion
of the Adviser, such securities have the potential for future income or capital
appreciation.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described more
fully in the SAI. See "Investment Objective, Policies and Restrictions" in the
SAI.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may invest in
zero coupon bonds, deferred interest bonds and bonds on which the interest is
payable in kind ("PIK bonds".) Zero coupon and deferred interest bonds are debt
obligations which are issued at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at a
rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations which provide
that the issuer thereof may, at its option, pay interest on such bonds in cash
or in the form of additional debt obligations. Such investments benefit the
issuer by mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer receipt of
such cash. Such investments may experience greater volatility in market value
due to changes in interest rates than debt obligations which make regular
payments of interest. The Fund will accrue income on such investments for tax
and accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's distribution
obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
("CMOs"), which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities (such collateral collectively hereinafter
referred to as "Mortgage Assets"). The Fund may also invest a portion of its
assets in multiclass pass-through securities which are equity interests in a
trust composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities. Payments
of principal of and interest on the Mortgage Assets, and any reinvested income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. In CMOs, a series of
bonds or certificates are usually issued in multiple classes with different
maturities. Each class of CMOs, often referred to as a "tranch", is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier then their stated maturities or final
distribution dates, resulting in a loss of all or a part of the premium, if any
has been paid. The Fund may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
Bonds generally require payments of a specified amount of principal on each
payment date. PAC Bonds are always parallel pay CMOs with the required principal
payment on such securities having the highest priority after interest has been
paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), which are derivative securities
usually structured with two classes that receive different proportions of the
interest and principal distributions from an underlying pool of mortgage assets.
For a further description of SMBS and the risks related to transactions therein,
see the SAI.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities. Mortgage pass-through securities are securities representing
interests in "pools" of mortgage loans. Monthly payments of interest and
principal by the individual borrowers on mortgages are passed through to the
holders of the securities (net of fees paid to the issuer or guarantor of the
securities) as the mortgages in the underlying mortgage pools are paid off. The
average lives of mortgage pass-throughs are variable when issued because their
average lives depend on prepayment rates. The average life of these securities
is likely to be substantially shorter than their stated final maturity as a
result of unscheduled principal prepayment. Prepayments on underlying mortgages
result in a loss of anticipated interest, and all or part of a premium if any
has been paid, and the actual yield (or total return) to the Fund may be
different than the quoted yield on the securities. Mortgage prepayments
generally increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the value of
a mortgage pass-through security generally will decline; however, when interest
rates are declining, the value of mortgage pass-through securities with
prepayment features may not increase as much as that of other fixed income
securities.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as changes in exchange rates and more limited information about foreign
issuers.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by the Fund with another party of cash
payments based upon different interest rate indexes, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a principal
amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in a foreign currency, in each case based on a fixed
rate, the swap agreement would tend to decrease the Fund's exposure to U.S.
interest rates and increase its exposure to foreign currency and interest rates.
Caps and floors have an effect similar to buying or writing options. Depending
on how they are used, swap agreements may increase or decrease the overall
volatility of the Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps generally involve leverage, which serves to magnify the extent of
any gains or losses. In additiion, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. The Fund may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI on the risks involved in, these activities.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made to member firms
(and subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and
to member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, U.S. Treasury securities or an
irrevocable letter of credit maintained on a current basis at an amount at least
equal to the market value of the securities loaned. If the Adviser determines to
make securities loans, it is intended that the value of the securities loaned
would not exceed 30% of the value of the total assets of the Fund.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets
in loans. By purchasing a loan, the Fund acquires some or all of the interest of
a bank or other lending institution in a loan to a corporate borrower. Many such
loans are secured, and most impose restrictive covenants which must be met by
the borrower. These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods or services. These claims may
also be purchased at a time when the company is in default. Certain of the loans
acquired by the Fund may involve revolving credit facilities or other standby
financing commitments which obligate the Fund to pay additional cash on a
certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The Fund
will only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction.
"WHEN-ISSUED" SECURITIES: The Fund may purchase some securities on a
"when-issued" or on a "forward delivery" basis, which means that the securities
will be delivered to the Fund at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. The Fund does not pay
for the securities until received, and does not start earning interest on the
securities until the contractual settlement date. In order to invest its assets
immediately, while awaiting delivery of securities purchased on such bases, the
Fund will normally invest in short-term securities that offer same-day
settlement and earnings.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates may increase or decrease
if the underlying instrument appreciates), and may have return characteristics
similar to direct investments in the underlying instrument or to one or more
options on the underlying instrument. Indexed securities may be more volatile
than the underlying instrument itself.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card or automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the SAI for further
information on these securities.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is liquid and thus not subject to a Fund's limitation on investing not
more than 15% of its net assets in illiquid investments. The Board of Trustees
has adopted guidelines and delegated to MFS the daily function of determining
and monitoring the liquidity of Rule 144A securities. The Board, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. The Board will carefully monitor the Fund's investments in Rule
144A securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of decreasing the level of liquidity in the Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing Rule
144A securities held in the Fund's portfolio. Subject to the Fund's 15%
limitation on investments in illiquid investments, the Fund may also invest in
restricted securities that may not be sold under Rule 144A, which presents
certain risks. As a result, the Fund might not be able to sell these securities
when the Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily available. Therefore,
judgment may at times play a greater role in valuing these securities than in
the case of unrestricted securities.
OPTIONS ON SECURITIES: The Fund may write (sell) "covered" put and call options
on domestic and foreign fixed income securities. Call options written by the
Fund give the holder the right to buy the underlying securities from the Fund at
a fixed exercise price up to a stated expiration date or, in the case of certain
options, on such date. Put options give the holder the right to sell the
underlying security to the Fund during the term of the option at a fixed
exercise price up to a stated expiration date or, in the case of certain
options, on such date. Call options are "covered" by the Fund, for example, when
it owns the underlying securities, and put options are "covered" by the Fund,
for example, when it has established a segregated account of cash, short-term
money market instruments and high quality debt securities which can be
liquidated promptly to satisfy any obligation of the Fund to purchase the
underlying securities. The Fund may also write straddles (combinations of puts
and calls on the same underlying security). Such transactions generate
additional premium income but also include greater risk.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. By writing a call option, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. It is possible, however, that
illiquidity in the options markets may make it difficult from time to time for
the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security changes sufficiently, the option may expire
without value to the Fund.
The Fund may write and purchase options on securities not only for hedging
purposes, but also for the purpose of increasing its return, which involves
greater risk. Options on securities that are written or purchased by the Fund
will be traded on U.S. and foreign exchanges and over-the-counter.
The Fund may also enter into options on the yield "spread" or yield differential
between two fixed income securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging purposes. In contrast to other types
of options, a yield curve option is based on the difference between the yields
of designated fixed income securities rather than the actual prices of the
individual securities. Yield curve options written by the Fund will be "covered"
but could involve additional risks, as discussed in the SAI.
The staff of the Securities and Exchange Commission (the "SEC") has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities held by the Fund, cannot exceed a certain percentage
of the Fund's assets (the "SEC illiquidity ceiling"). Although the Adviser
disagrees with this position, the Adviser intends to limit the Fund's writing of
over-the-counter options in accordance with the following procedure. Except as
provided below, the Fund intends to write over-the-counter options only with
primary U.S. Government securities dealers recognized as such by the Federal
Reserve Bank of New York. Also, the contracts which the Fund has in place with
such primary dealers provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula generally is based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any, of
the option's intrinsic value (i.e., the amount that the option is in-the-money).
The formula may also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written out-of-the-money. The Fund will treat all or a portion of the formula
price as illiquid for purposes of the SEC illiquidity ceiling. The Fund may also
write over-the-counter options with non-primary dealers, including foreign
dealers, and will treat the assets used to cover these options as illiquid for
purposes of the SEC illiquidity ceiling.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and
sell futures contracts on fixed income securities or indices of such securities,
including municipal bond indices and any other indices of fixed income
securities which may become available for trading ("Futures Contracts"). The
Fund may also purchase and write options on such Futures Contracts ("Options on
Futures Contracts"). These instruments will be used to hedge against anticipated
future changes in interest rates which otherwise might either adversely affect
the value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should interest
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of the hedging transactions and may realize a loss. The Fund may also
purchase and sell Futures Contracts and Options on Futures Contracts for
non-hedging purposes, subject to applicable law, which involves greater risk and
could result in losses which are not offset by gains on other portfolio assets.
In order to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the Commodity Futures
Trading Commission (the "CFTC") require that the Fund enter into transactions in
Futures Contracts and Options on Futures Contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-hedging
purposes, provided that the aggregate initial margin and premiums on such
non-hedging positions does not exceed 5% of the liquidation value of the Fund's
assets. In addition, the Fund must comply with the requirements of various state
securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options on securities, on Futures Contracts or on foreign currencies, if as a
result, more than 5% of its total assets would be invested in such options.
Futures Contracts and Options on Futures Contracts that are entered into by the
Fund will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts ("Forward Contracts") to attempt to minimize the risk to the Fund from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A Forward Contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. The Fund may enter
into a Forward Contract, for example, when it enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security. Additionally, for example, when
the Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a Forward Contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Conversely, when the
Fund believes that the U.S. dollar may suffer a substantial decline against a
foreign currency, it may enter into a Forward Contract to buy that foreign
currency for a fixed dollar amount. The Fund may also enter into a Forward
Contract on one Currency in order to hedge against risk of loss arising from
fluctuations in the value of a second currency (referred to as a "cross-hedge")
if, in the judgment of the Adviser, a reasonable degree of correlation can be
expected between movements in the values of the two currencies. The Fund has
established procedures consistent with the General Statement of Policy of the
SEC concerning such purchases. Since that policy currently recommends that an
amount of the Fund's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the Fund will always have cash,
high quality debt securities or cash equivalents available sufficient to cover
any commitments under these contracts or to limit any potential risk. The
segregated account will be marked to market on a daily basis. The Fund may also
be required to, or may elect to, receive delivery of foreign currencies
underlying Forward Contracts, which may involve certain risks. The Fund has
established procedures consistent with statements of the SEC and its staff
regarding the use of Forward Contracts by registered investment companies, which
requires use of segregated assets or "cover" in connection with the purchase and
sale of such contracts. See "Investment Objective and Policies -- Additional
Risk Factors" below. The Fund has established procedures consistent with
statements of the SEC and its staff regarding the use of Forward Contracts by
registered investment companies, which requires the use of segregated assets or
"cover" in connection with the purchase and sale of such contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of foreign portfolio securities and against increases in the
dollar cost of foreign securities to be acquired. As in the case of other kinds
of options, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received, and
the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies written or purchased by
the Fund will be traded on U.S. and foreign exchanges and over-the-counter. The
Fund may also be required to, or may elect to, receive delivery of foreign
currency underlying options on foreign currencies, which may involve certain
risks. See Additional Risk Factors -- Options, Futures Contracts and Forward
Contracts" below.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk factors
described above. Additional information concerning risk factors can be found
under the caption "Investment Objective, Policies and Restrictions" in the SAI.
FIXED INCOME SECURITIES: Because shares of the Fund represent an investment in
securities with fluctuating market prices, shareholders should understand that
the value of shares of the Fund will vary as the aggregate value of the
portfolio securities of the Fund increases or decreases. However, changes in the
value of securities subsequent to their acquisition will not affect cash income
or yield to maturity to the Fund.
The net asset value of the shares of an open-end investment company such as the
Fund, which invests primarily in fixed income securities, changes as the general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested at higher yields can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested at lower yields can be
expected to decline.
The Fund seeks to maximize the return on its portfolio by taking advantage of
market developments, yield disparities and variations in the creditworthiness of
issuers. This may result in increases or decreases in the current income of the
Fund available for distribution to its shareholders and in the holding by the
Fund of debt securities which sell at moderate to substantial premiums or
discounts from face value. Moreover, if the Fund's expectations of changes in
interest rates or its evaluation of the normal yield relationship between two
securities proves to be incorrect, the income, net asset value and potential
capital gain of the Fund may be decreased or its potential capital loss may be
increased.
LOWER-RATED FIXED INCOME SECURITIES: Securities offering the high current income
sought by the Fund are ordinarily in the lower rating categories of recognized
rating agencies (that is, ratings of Baa or lower by Moody's Investors Service,
Inc. ("Moody's") or BBB or lower by Standard & Poor's Ratings Services ("S&P")
or Fitch Investors Service, Inc. ("Fitch")) or are unrated and, as described
below, generally involve greater volatility of price and risk of principal and
income than securites in the higher rating categories. Accordingly, an
investment in shares of the Fund should not constitute a complete investment
program and may not be appropriate for all investors. The Fund, however, seeks
to reduce risk through diversification, credit analysis and attention to current
developments and trends in both the economy and financial markets. In addition,
investments in foreign securities may serve to provide further diversification.
The Fund may invest in fixed income securities rated Baa by Moody's or BBB by
S&P or Fitch (and comparable unrated securities). These securities, while
normally exhibiting adequate protection parameters, have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
The Fund may also invest in fixed income securities rated Ba or lower by Moody's
or BB or lower by S&P or Fitch (and comparable unrated securities) (commonly
known as "junk bonds"). No minimum rating standard is required by the Fund.
These securities are considered speculative and, while generally providing
greater income than investments in higher rated securities, will involve greater
risk of principal and income (including the possibility of default or bankruptcy
of the issuers of such securities) and may involve greater volatility of price
(especially during periods of economic uncertainty or change) than securities in
the higher rating categories and because yields vary over time, no specific
level of income can ever be assured. These lower-rated high yielding fixed
income securities generally tend to be affected by economic changes (and the
outlook for economic growth), short-term corporate and industry developments and
the market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities, which react
primarily to fluctuations in the general level of interest rates (although these
lower-rated securities are also affected by changes in interest rates as
described below). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on
the Fund's lower-rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, the Fund
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower-rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower-rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times of
certain adverse market conditions to sell these lower-rated securities to meet
redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. The Fund's achievement of
its investment objective may be more dependent on the Adviser's own credit
analysis than in the case of an investment company primarily investing in higher
quality fixed income securities.
FOREIGN SECURITIES: Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. These include changes in currency rates, exchange control
regulations, governmental administration or economic or monetary policy (in the
United States or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies. Special
considerations may also include more limited information about foreign issuers,
higher brokerage costs, different accounting standards and thinner trading
markets. Foreign securities markets may also be less liquid, more volatile and
less subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. The Fund may
hold foreign currency received in connection with investments in foreign
securities when, in the jdgment of the Adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate. The Fund may also hold foreign currency
in anticipation of purchasing foreign securities.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or if the Fund has entered into a contract
to sell the security, in possible liability to the purchaser. Certain markets
may require payment for securities before delivery, and in such markets the Fund
bears the risk that the securities will not be delivered and that the Fund's
payments will not be returned. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain emerging market debt obligations may be restricted or
controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Fund will enter
into certain transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies for hedging
purposes, such transactions nevertheless involve risks. For example, a lack of
correlation between the instrument underlying an option or Futures Contract and
the assets being hedged, or unexpected adverse price movements, could render the
Fund's hedging strategy unsuccessful and could result in losses. The Fund also
may enter into option transactions and Futures Contracts and Options on Futures
Contracts for other than hedging purposes, which involves greater risk. In
addition, there can be no assurance that a liquid secondary market will exist
for any contract purchased or sold, and the Fund may be required to maintain a
position until exercise or expiration, which could result in losses. The SAI
contains a further description of options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies, and a discussion
of the risks related to transactions therein. Transactions entered into for
non-hedging purposes involve greater risk and could result in losses which are
not offset by gains on other portfolio assets.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated
which creates a currency exchange rate risk. The Fund may also choose to, or be
required to, receive delivery of the foreign currencies underlying Forward
Contracts and options on foreign currencies it has entered into. Under certain
circumstances, such as where the Adviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the Fund
may hold such currencies for an indefinite period of time. While the holding of
currencies will permit the Fund to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Fund to risk of loss if
exchange rates move in a direction adverse to the Fund's position. Such losses
could reduce any profits or increase any losses sustained by the Fund from the
sale or redemption of securities and could reduce the dollar value of interest
or dividend payments received.
Transactions in options may be entered into by the Fund on United States
exchanges regulated by the SEC, in the over-the-counter market and on foreign
exchanges, while Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on United States exchanges regulated by the CFTC and on foreign
exchanges. In addition, the securities underlying options and Futures Contracts
traded by the Fund may include foreign as well as domestic securities. Investing
in foreign securities and trading in foreign markets involve considerations and
possible risks not typically associated with investing in domestic securities or
entering into transactions on domestic exchanges. The value of foreign
securities investments will be affected by changes in currency rates or exchange
control regulations, changes in governmental administration or economic or
monetary policy (in this country or abroad) or changed circumstances in dealings
between nations. Costs may be incurred in connection with conversions between
various currencies. Moreover, foreign issuers are not subject to accounting,
auditing and financial reporting standards and requirements comparable to those
of domestic issuers. Securities and other instruments issued or traded in
foreign countries may be less liquid and more volatile than those issued or
traded in the United States and foreign brokerage commissions are generally
higher than in the United States. Foreign securities and foreign markets may be
less subject to governmental supervision than in the United States, and foreign
exchanges may impose different exercise and settlement procedures. Investments
in foreign countries could be affected by other factors not present in the
United States, including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. Over-the-counter transactions also involve certain
risks which may not be present in exchange-traded transactions.
SHORT-TERM INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES: During periods of
unusual market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, part or all of the assets of the Fund may be invested in cash
(including foreign currency) or short-term money market instruments including,
but not limited to, certificates of deposit, commercial paper, short-term notes,
obligations issued or guaranteed by the U.S. Government or any of its agencies
or instrumentalities and repurchase agreements.
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. Consistent with the
foregoing primary consideration, the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD") and such other policies as
the Trustees may determine, the Adviser may consider sales of shares of the Fund
and of the other investment company clients of MFD as a factor in the selection
of broker-dealers to execute the portfolio transactions of the Fund. From time
to time, the Adviser may direct certain portfolio transactions to broker-dealer
firms which, in turn, have agreed to pay a portion of the Fund's operating
expenses (e.g., fees charged by the custodian of the Fund's assets). For a
further discussion of portfolio trading, see "Portfolio Transactions and
Brokerage Commissions" in the SAI.
The policies described above are not fundamental and may be changed without
shareholder approval, as may the investment objective of the Fund. The SAI
includes a discussion of other investment policies and a listing of specific
investment restrictions which govern the investment policies of the Fund and
which may be changed without shareholder approval unless indicated otherwise.
See the "Investment Restrictions" in the SAI. The Fund's investment limitations
and policies are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement, dated May 20, 1987, as amended (the "Advisory Agreement"). MFS
provides the Fund with overall investment advisory and administrative services,
as well as general office facilities. Robert J. Manning, a Senior Vice President
of the Adviser, has been the Fund's portfolio manager since June, 1994. Mr.
Manning has been employed as a portfolio manager by the Adviser since 1984.
Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for the Fund. For these services and facilities, MFS
receives a management fee, computed and paid monthly, on the basis of a formula
based upon a percentage of the average daily net assets of the Fund plus a
percentage of its gross income (i.e., income other than gains from the sale of
securities or gains received from futures contracts) in each case on an
annualized basis for the then-current fiscal year of the Fund. The applicable
percentages are reduced as assets and income reach the following levels:
<TABLE>
<CAPTION>
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
--------------------------------- -----------------------------
<C> <C>
0.220% of the first $200 million 3.00% of the first $22 million
0.187% of average daily net assets in excess of $200 million 2.55% of gross income in excess of $22 million
</TABLE>
For the Fund's fiscal year ended January 31, 1996, MFS received management fees
under the Advisory Agreement of $4,031,708 (equivalent to 0.45% of the Fund's
average daily net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Variable
Insurance Trust, MFS Institutional Trust, MFS Union Standard Trust, MFS/Sun Life
Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable
accounts, each of which is a registered investment company established by Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of various fixed/variable annuity contracts. MFS and
its wholly owned subsidiary, MFS Asset Management, Inc., provide investment
advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $45.4 billion on behalf of approximately 2 million investor
accounts as of April 30, 1996. As of such date, the MFS organization managed
approximately $19.4 billion of assets in fixed income funds and fixed income
portfolios of MFS Asset Management, Inc. MFS is a subsidiary of Sun Life of
Canada (U.S.) which in turn is a wholly owned subsidiary of Sun Life Assurance
Company of Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin,
Jeffrey L. Shames, Arnold D. Scott, John R. Gardner and John D. McNeil. Mr.
Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is the
Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil and
Gardner are the Chairman and the President, respectively, of Sun Life. Sun Life,
a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report directly to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is also the Chairman and
President of the Trust. Joan S. Batchelder, Cynthia M. Brown, Matthew N.
Fontaine, Robert J. Manning, Bernard Scozzafava, James T. Swanson, W. Thomas
London, Stephen E. Cavan, James O. Yost and James R. Bordewick, Jr., all of
whom are officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial will share their
views on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS will have access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial will have
access to the extensive U.S. equity investment expertise of MFS. One or more MFS
investment analysts are expected to work for an extended period with Foreign &
Colonial's portfolio managers and investment analysts at their offices in
London. In return, one or more Foreign & Colonial employees are expected to work
in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ("Shareholder Servicing
Agent"), a wholly owned subsidiary of MFS, performs transfer agency, dividend
disbursing agency and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer and other financial institutions ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
The Fund offers three classes of shares (Class A, B and C shares) which bear
sales charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- ---------- ---------------
<S> <C> <C> <C>
Less than $100,000 ......................................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ............................................ 4.00 4.17 3.20
$250,000 but less than $500,000 ............................................ 2.95 3.04 2.25
$500,000 but less than $1,000,000 .......................................... 2.20 2.25 1.70
$1,000,000 or more ......................................................... None** None** See Below**
<FN>
- ----------
*Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated using
the percentages above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In
the following two circumstances, Class A shares are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended, if the
sponsoring organization demonstrates to the satisfaction of MFD that either
(a) the employer has at least 25 employees or (b) the aggregate purchases by
the retirement plan of Class A shares of the MFS Funds will be in an amount
of at least $250,000 within a reasonable period of time, as determined by
MFD in its sole discretion.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
---------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ..................................................... 4%
Second .................................................... 4%
Third ..................................................... 3%
Fourth .................................................... 3%
Fifth ..................................................... 2%
Sixth ..................................................... 1%
Seventh and following ..................................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
MFD will pay commissions to dealers of 3.75% of the purchase price of Class B
shares purchased through dealers. MFD will also advance to dealers the first
year service fee payable under the Fund's Class B Distribution Plan (see
"Distribution Plans" below) at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of Class
B shares is 4% of the purchase price of the shares (commission rate of 3.75%
plus a service fee equal to 0.25% of the purchase price).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
Fund. Shares purchased through the reinvestment of distributions paid in respect
of Class B shares will be treated as Class B shares for purposes of the payment
of the distribution and service fees under the Distribution Plan applicable to
Class B shares. See "Distribution Plans" below. However, for purposes of
conversion to Class A shares, all shares in a shareholder's account that were
purchased through the reinvestment of dividends and distributions paid in
respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bears to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions. In
certain circumstances, the CDSC imposed upon redemption of Class C shares is
waived. These circumstances are described in Appendix A to this Prospectus. See
"Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plans"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code") if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and the
minimum additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject any specific purchase order or to restrict purchases by a
particular purchaser (or group of related purchasers). The Fund or MFD may
reject or restrict any purchases by a particular purchaser or group, for
example, when such purchase is contrary to the best interests of the Fund's
other shareholders or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are effected
in a timed account in the same calendar quarter or (ii) a purchase would result
in shares being held in timed accounts by market timers representing more than
(x) one percent of the Fund's net assets or (y) specified dollar amounts in the
case of certain MFS Funds which may include the Fund and which may change from
time to time. The Fund and MFD each reserve the right to request market timers
to redeem their shares at net asset value, less any applicable CDSC, if either
of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RETIREMENT PLAN ACCOUNTS. Following the termination of any agreement between
a plan sponsor and the Shareholder Servicing Agent or its affiliates with
respect to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent, the Shareholder
Servicing Agent shall combine all plan participant accounts into a single
omnibus or pooled account for each Fund in which the plan invests.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale).
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of an
MFS Fund to shares of any other MFS Fund, except with respect to exchanges from
an MFS money market fund to another MFS Fund which is not an MFS money market
fund (discussed below). With respect to an exchange involving shares subject to
a CDSC, the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth in this
paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
New York Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"),
the exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange privilege
and prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers. Special procedures, privileges and restrictions with respect
to exchanges may apply to market timers who enter into an agreement with MFD, as
set forth in such agreement. See "Purchases -- General -- Right to Reject
Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
will not be responsible for any losses resulting from unauthorized telephone
transactions if it follows reasonable procedures designed to verify the identity
of the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C shares and Class B shares purchased on or after January 1, 1993
will be aggregated on a calendar month basis -- all transactions made during a
calendar month, regardless of when during the month they have occurred, will age
one year at the close of business on the last day of such month in the following
calendar year and each subsequent year. For Class B shares of the Fund purchased
prior to January 1, 1993, transactions will be aggregated on a calendar year
basis -- all transactions made during a calendar year, regardless of when during
the year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year. Prior to April 1, 1996, Class
C shares of the MFS Funds were not subject to a CDSC upon redemption. In no
event will Class C shares of the MFS Funds purchased prior to this date be
subject to a CDSC. For the purpose of calculating the CDSC upon redemption of
shares acquired in an exchange on or after April 1, 1996, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares (if such original purchase occurred
prior to April 1, 1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for Class
C Shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. Subject to compliance with applicable regulations,
the Fund has reserved the right to pay the redemption or repurchase price of
shares of the Fund, either totally or partially, by a distribution in-kind of
securities (instead of cash) from the Fund's portfolio. The securities
distributed in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plans"), after having concluded that there is a
reasonable likelihood that the Distribution Plans would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below have not yet been imposed or
are being waived. These circumstances are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under each Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the separate Distribution Plans. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expense incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The Distribution Plans have substantially identical provisions with respect to
their operating policies and their initial approval, renewal, amendment and
termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered pursuant to
an initial sales charge, a substantial portion of which is paid to or retained
by the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets attributable
to Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more of Class A shares which are sold at net asset value but
which are subject to a 1% CDSC for one year after purchase). See "Purchases --
Class A Shares" above. In addition, to the extent that the aggregate service and
distribution fees paid under the Class A Distribution Plan do not exceed 0.35%
per annum of the average daily net assets of the Fund attributable to Class A
shares, the Fund is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value
without an initial sales charge but are subject to a CDSC. See "Purchases --
Class B Shares" above. MFD will advance to dealers the first year service fee
described above at a rate equal to 0.25% of the purchase price of such shares
and, as compensation therefore, MFD may retain the service fee paid by the Fund
with respect to such shares for the first year after purchase. Dealers will
become eligible to receive the ongoing 0.25% per annum service fee with respect
to such shares commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets attributable
to Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C DISTRIBUTION PLAN. Class C shares are offered at net asset value
without an initial sales charge but are subject to a CDSC. See "Purchases --
Class C shares" above. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to dealers, MFD
will retain the 1.00% per annum Class C distribution and service fees paid by
the Fund with respect to such shares for the first year after purchase, and
dealers will become eligible to receive from MFD the ongoing 1.00% per annum
distribution and service fees paid by the Fund to MFD with respect to such
shares commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Class C Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Class C Distribution Plan equal, on an annual basis, to
0.75% of the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.26%,
1.00% and 1.00% per annum, respectively. The Fund is currently paying
distribution fees of 0.05% under the Class A Distribution Plan. Payment of the
remaining portion of the 0.10% per annum distribution fee equal to 0.05% per
annum will commence on such date as the Trustees of the Trust may determine.
Assets attributable to Class A shares sold prior to March 1, 1991 are subject to
a service fee of 0.15% per annum.
DISTRIBUTIONS
The Fund intends to declare daily and pay to its shareholders substantially all
of its net investment income as dividends on a monthly basis. Dividends
generally are distributed on the first business day of the following month. In
addition, the Fund will make one or more distributions during the calendar year
to its shareholders from any long-term capital gains, and may also make one or
more distributions during the calendar year to its shareholders from short-term
capital gains. Shareholders may elect to receive dividends and capital gain
distributions in either cash or additional shares of the same class with respect
to which a distribution is made. All distributions not paid in cash will be
reinvested in shares of the class in which the distribution is paid. (see "Tax
Status" and "Shareholder Services -- Distribution Options" below). Distributions
paid by the Fund with respect to Class A shares will generally be greater than
those paid with respect to Class B and Class C shares because expenses
attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), and to make distributions to its shareholders
in accordance with the timing requirements imposed by the Code. It is expected
that the Fund will not be required to pay any entity level federal income or
excise taxes, although foreign-source income received by the Fund may be subject
to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on dividends and capital gain distributions from the Fund
whether paid in cash or additional shares. The Fund expects that its
distributions will not, for the most part, be eligible for the dividends
received deduction for corporations. Shortly after the end of each calendar
year, each shareholder will receive a statement setting forth the federal income
tax status of all dividends and distributions for that year, including the
portion taxable as ordinary income, the portion, if any, taxable as long-term
capital gain, the portion, if any, representing a return of capital (which is
generally free of current taxes, but results in a basis reduction), and the
amount, if any, of federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution of net
capital gains or net short-term capital gains may thus pay the full price for
the shares and then effectively receive a portion of the purchase price back as
a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. However, backup withholding will not
be applied to payments that have been subject to 30% withholding. Prospective
investors should read the Fund's Account Application for additional information
regarding backup withholding of federal income tax and should consult their own
tax advisers as to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the Fund's
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Assets in the Fund's portfolio are valued on
the basis of valuations furnished by a pricing service or at their fair value,
as described in the SAI. The net asset value of each class of shares is
effective for orders received in "good order" by the dealer prior to its
calculation and received by MFD, prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES The Fund, one of two series
of the Trust, has three classes of shares, entitled Class A, Class B and Class C
Shares of Beneficial Interest (without par value). The Trust has reserved the
right to create and issue additional classes and series of shares, in which case
each class of shares of a series would participate equally in the earnings,
dividends and assets attributable to that class of shares of that particular
series. Shareholders are entitled to one vote for each share held and shares of
each series would be entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions, but shares of all series would
vote together in the election of Trustees and selection of accountants.
Additionally, each class of shares of a series will vote separately on any
material increases in the fees under its Distribution Plan or on any other
matter that affects solely its class of shares, but will otherwise vote together
with all other classes of shares of the series on all other matters. The Trust
does not intend to hold annual shareholder meetings. The Declaration of Trust
provides that a Trustee may be removed from office in certain instances (see
"Description of Shares, Voting Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to any liabilities of that class.
Shares have no pre-emptive or conversion rights (except as set forth above in
"Purchases -- Conversion of Class B Shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, the shareholders of each class
would be entitled to share pro rata in its net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and errors and omissions insurance) existed
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as the Lipper
Analytical Services, Inc. and Wiesenberger Investment Companies Service. Yield
quotations will be based on the annualized net investment income per share
allocated to each class of the Fund over a 30-day period stated as a percent of
the maximum public offering price of that class on the last day of that period.
Yield calculations for Class B shares assume no CDSC is paid. The current
distribution rate for each class is generally based upon the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past twelve months and is computed by dividing the amount of such dividends by
the maximum public offering price of that class at the end of such period.
Current distribution rate calculations for Class B shares and Class C shares
assume no CDSC is paid. The current distribution rate differs from the yield
calculation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains, and return of invested capital, and is calculated over
a different period of time. Total rate of return quotations will reflect the
average annual percentage change over stated periods in the value of an
investment in each class of shares of the Fund made at the maximum public
offering price of shares of that class with all distributions reinvested and
which, if quoted for periods of six years or less, will give effect to the
imposition of any applicable CDSC assessed upon redemptions of the Fund's Class
B and Class C shares. Such total rate of return quotations may be accompanied by
quotations which do not reflect the reduction in value of the initial investment
due to the sales charge or the deduction of a CDSC, and which will thus be
higher. All performance quotations of the Fund are based on historical
performance and are not intended to indicate future performance. Yield reflects
only net portfolio income as of a stated time and current distribution rate
reflects only the rate of distributions paid by the Fund over a stated period of
time, while total rate of return reflects all components of investment return
over a stated period of time. The quotations of the Fund may from time to time
be used in advertisements, shareholder reports or other communications to
shareholders. For a discussion of the manner in which the Fund will calculate
its yield, current distribution rate and total rate of return, see the SAI. For
further information about the Fund's performance for the fiscal year ended
January 31, 1996, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number). In addition to information
provided in shareholder reports, the Fund may, in its discretion, from time to
time, make a list of all or a portion of its holdings available to investors
upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS: Each shareholder will receive confirmation
statements showing the transaction activity in his account. At the end of each
calendar year, each shareholder will receive information regarding the tax
status of all reportable dividends and distributions for that year (see "Tax
Status").
DISTRIBUTION OPTIONS: The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions (except as provided below)
reinvested in additional shares.
-- Dividends and capital gain distributions in cash.
With respect to the second option, the Fund may from time to time make
distributions from short-term capital gains on a monthly basis, and to the
extent such gains are distributed monthly, they shall be paid in cash; any
remaining short-term capital gains not so distributed shall be reinvested in
additional shares.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gains
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS: For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with Class B or Class C shares of the Fund
or any of the classes of other MFS Funds or MFS Fixed Fund (a bank collective
investment fund) within a 13-month period (or 36-month period for purchases of
$1 million or more), the shareholder may obtain such shares of the Fund at the
same reduced sales charge as though the total quantity were invested in one lump
sum, subject to escrow agreements and the appointment of an attorney for
redemptions from the escrow amount if the intended purchases are not completed,
by completing the Letter of Intent section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of the Class A, Class B and
Class C shares of that shareholder in the MFS Funds or MFS Fixed Fund, reaches a
discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of any other MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan (a "SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B and Class C shares in any year pursuant to
a SWP will not be subject to any CDSC and generally are limited to 10% of the
value of the account at the time of the establishment of the SWP. The CDSC will
not be waived in the case of SWP redemptions of Class A shares which are subject
to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more through a
shareholder's checking account twice monthly, monthly or quarterly. Required
forms are available from the Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund, may exchange their shares for the same class of shares
of the other MFS Funds (and, in the case of Class C shares, for shares of MFS
Money Market Fund) under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic monthly or quarterly exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder if such fund is available for
sale. Under the Automatic Exchange Plan, exchanges of at least $50 each may be
made to up to four different funds. A shareholder should consider the objectives
and policies of a fund and review its prospectus before electing to exchange
money into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund or Class A shares of MFS Cash Reserve Fund will be subject to
any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, could result in a capital gain or loss to the shareholder making the
exchange. See the SAI for further information concerning the Automatic Exchange
Plan. Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in shares purchases in the case of Class A shares and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans
and other corporate pension and profit-sharing plans. Investors should consult
with their tax advisers before establishing any of the tax-deferred retirement
plans described above.
--------------------
The Fund's SAI, dated June 1, 1996, contains more detailed information about the
Trust and the Fund, including, but not limited to, information related to (i)
investment objective, policies and restrictions, including the purchase and sale
of Options, Futures Contracts, Options on Futures Contracts, Forward Contracts
and options on foreign currencies, (ii) Trustees, officers and investment
adviser, (iii) portfolio transactions and brokerage commissions, (iv) the Fund's
shares, including rights and liabilities of shareholders, (v) the method used to
calculate yield and total rate of return quotations of the Fund, (vi) the Class
A, Class B and Class C Distribution Plans and (vii) various services and
privileges provided by the Fund for the benefit of its shareholders, including
additional information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares is waived (Section II), and
the CDSC for Class B and Class C shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life Assurance Company of Canada ("Sun Life")
or any of their subsidiary companies;
* Trustees and retired trustees of any investment company for which
MFD serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
* Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of Plan participant;
* Loan from Plan (repayment of loans, however, will constitute new sales
for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section 1.401
(k)-1(d)(2), as amended from time to time);
* Termination of employment of Plan participant (excluding, however, a
partial or other termination of the Plan);
* Tax-free return of excess Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the Plan (e.g., participant account
fees), provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent; and
* Distributions from a Plan that has invested its assets in one or more
of the MFS Funds for more than 10 years from the later to occur of:
(i) January 1, 1993 or (ii) the date such Plan first invests its
assets in one or more of the MFS Funds. The sales charges will be
waived in the case of a redemption of all of the Plan's shares in all
MFS Funds (i.e., all the assets of the Plan invested in the MFS Funds
are withdrawn), unless immediately prior to the redemption, the
aggregate amount invested by the Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the Plan's assets in
the MFS Funds, in which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the contingent deferred sales charge imposed on certain
redemptions of Class A shares is waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the Plan participant,
as applicable, has attained the age of 70 1/2 years old, but only with
respect to the minimum distribution under applicable Internal Revenue
Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Services ("S&P"), Fitch Investors Service, Inc. ("Fitch") and Duff &
Phelps Credit Rating Co. represent their opinions as to the quality of various
debt instruments. It should be emphasized, however, that ratings are not
absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments
of the same maturity and coupon with different ratings may have the same
yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions, however, are more likely to
have adverse impact on these bonds, and therefor impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is unlikely to result in a rating change and the likely
direction of such change. These are designated as "Positive," indicating a
potential upgrade, "Negative," for potential downgrade, or "Evolving," where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "D-1+".
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business, and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 Good certainty of timely payment. Liquidity factors and company fundamentals
are sound. Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors are small.
D-3 Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5 Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
APPENDIX C
PORTFOLIO COMPOSITION CHART
MFS HIGH INCOME FUND
FOR FISCAL YEAR ENDED JANUARY 31, 1996
The table below shows the percentages of the Fund's assets at January 31,
1996 invested in securities assigned to the various rating categories by S&P,
Moody's (provided only for securities not rated by S&P), Fitch (provided only
for securities not rated by S&P or Moody's) and Duff & Phelps (provided only for
securities not rated by S&P, Moody's or Fitch) and in unrated securities
determined by MFS to be of comparable quality. For a split rated bond, the S&P
rating is used, and when an S&P rating is unavailable, secondary sources are
selected in the following order: Moody's, Duff & Phelps, and Fitch.
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ------ -------- -------------- -----
AAA/Aaa .................. -- -- --
AA/Aa .................... -- -- --
A/A ...................... -- -- --
BBB/Baa .................. 1.1% -- 1.1%
BB/Ba .................... 18.6% -- 18.6%
B/B ...................... 59.0% 2.3% 61.3%
CCC/Caa .................. 5.9% 0.5% 6.4%
CC/Ca .................... 1.1% -- 1.1%
C/C ...................... -- -- --
Default .................. 1.0% -- 1.0%
---- --- ----
TOTAL .................... 86.7% 2.8% 89.5%
==== === ====
The chart does not necessarily indicate what the composition of the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O.Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA02110
[LOGO]
MFS(R) HIGH INCOME FUND
500 Boylston Street
Boston, MA 02116
MHI-1-6/96/150M 18/218/318
[LOGO]
MFS(R) HIGH INCOME FUND
Prospectus
June 1, 1996
<PAGE>
[logo] MFS(R)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) HIGH INCOME FUND STATEMENT OF
ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) June 1, 1996
- -------------------------------------------------------------------------------
Page
----
1. Definitions ....................................................... 2
2. Investment Objective, Policies and Restrictions ................... 2
3. Management of the Fund ............................................ 12
Trustees ....................................................... 12
Officers ....................................................... 13
Investment Adviser ............................................. 13
Custodian ...................................................... 14
Shareholder Servicing Agent .................................... 14
Distributor .................................................... 14
4. Portfolio Transactions and Brokerage Commissions .................. 15
5. Shareholder Services .............................................. 16
Investment and Withdrawal Programs ............................. 16
Exchange Privilege ............................................. 18
Tax-Deferred Retirement Plans .................................. 18
6. Tax Status ........................................................ 18
7. Description of Shares, Voting Rights and Liabilities .............. 20
8. Determination of Net Asset Value and Performance .................. 20
9. Distribution Plans ................................................ 22
10. Independent Auditors and Financial Statements ..................... 23
Appendix A ........................................................ 24
MFS HIGH INCOME FUND
A Series of MFS Series Trust III
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI"), as amended or supplemented
from time to time, sets forth information which may be of interest to investors
but which is not necessarily included in the Fund's Prospectus dated June 1,
1996. This SAI should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by contacting the Shareholder Servicing
Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS High Income Fund, a series of
MFS Series Trust III (the "Trust"),
a Massachusetts business trust. The
Trust was known as "Massachusetts
Financial High Income Trust", until
its name was changed on August 20,
1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated
June 1, 1996, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to seek high current
income by investing primarily in a professionally managed diversified portfolio
of fixed income securities, some of which may involve equity features. Capital
growth, if any, is a consideration incidental to the objective of high current
income. There can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES. The fixed income and other securities in which the Fund may
invest and the risks associated with such investments are described in the
Fund's Prospectus. The following policies are not fundamental and may be changed
without shareholder approval as may the Fund's investment objective.
RESTRICTED SECURITIES: The Fund may invest in restricted securities of companies
which the Adviser believes have significant growth potential. These securities
are subject to legal or contractual restrictions on resale. Consequently, there
is no public trading market for these securities and market quotations are not
readily available. As a result, the Fund might not be able to sell these
securities when the Adviser wishes to do so, or might have to sell them at less
than fair value. The Fund may not invest more than 15% of its net assets in
restricted securities (as described in the Fund's investment restrictions)
(restricted securities the Board of Trustees has determined are liquid are not
included in this amount). See "Investment Objective, Policies and Restrictions
- -- Investment Restrictions."
The Fund will not (a) invest more than 5% of its assets, taken at market value,
in warrants not acquired in a unit transaction or (b) invest more than 15% of
its assets, taken at market value, in securities for which there are no readily
available market quotations.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct claims against a borrower. In purchasing loans, the Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. Loans that are fully
secured offer the Fund more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loans acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to pay
additional cash on a certain date or on demand. These commitments may have the
effect of requiring the Fund to increase its investment in a company at a time
when the Fund might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). The Fund will always have cash, short-term money market instruments or
debt securities sufficient to cover any commitments or to limit any potential
risk.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loans and other direct investments
which the Fund will purchase, the Adviser will rely upon its (and not that of
the original lending institution's) own credit analysis of the borrower. As the
Fund may be required to rely upon another lending institution to collect and
pass on to the Fund amounts payable with respect to the loan and to enforce the
Fund's rights under the loan, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent the Fund from receiving such amounts.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans may involve additional risks to the Fund. For example, if a loan is
foreclosed, the Fund could become part owner of any collateral, and would bear
the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is conceivable that under emerging legal theories of
lender liability, the Fund could be held liable as a co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the Fund relies on the Adviser's research in an attempt to
avoid situations where fraud or misrepresentation could adversely affect the
Fund. In addition, loan participations and other direct investments may not be
in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result,
the Fund may be unable to sell such investments at an opportune time or may have
to resell them at less than fair market value. To the extent that the Adviser
determines that any such investments are illiquid, the Fund will include them in
the investment limitations described below.
"WHEN-ISSUED" SECURITIES: When the Fund commits to purchase a security on a
"when-issued" or "forward delivery" basis, it will set up procedures consistent
with policies promulgated by the Securities and Exchange Commission (the "SEC")
concerning such purchases. Since that policy currently recommends that an amount
of the Fund's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the Fund will always have cash,
short-term money market instruments or debt securities sufficient to cover any
commitments or to limit any potential risk. However, although the Fund does not
intend to make such purchases for speculative purposes and intends to adhere to
policies promulgated by the SEC, purchases of securities on such bases may
involve more risk than other types of purchases. For example, the Fund may have
to sell assets which have been set aside in order to meet redemptions. Also, if
the Fund determines it necessary to sell the "when-issued" or "forward delivery"
securities before delivery, it may incur a loss because of market fluctuations
since the time the commitment to purchase such securities was made.
FOREIGN SECURITIES: As discussed in the Prospectus, investing in foreign
securities generally represents a greater degree of risk than investing in
domestic securities, due to possible exchange rate fluctuations, less publicly
available information, more volatile markets, less securities regulation, less
favorable tax provisions, war or expropriation. As a result of its investments
in foreign securities, the Fund may receive interest or dividend payments, or
the proceeds of the sale or redemption of such securities, in the foreign
currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the Fund
may hold such currencies for an indefinite period of time. While the holding of
currencies will permit the Fund to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Fund to risk of loss if
exchange rates move in a direction adverse to the Fund's position. Such losses
could reduce any profits or increase any losses sustained by the Fund from the
sale or redemption of securities and could reduce the dollar value of interest
or dividend payments received. The Fund may also hold foreign currency in
anticipation of purchasing foreign securities.
AMERICAN DEPOSITARY RECEIPTS: American Depositary Receipts ("ADRs") are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Fund may invest in either type of ADR. Although the
U.S. investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United States can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depository of an ADR agent bank in the foreign
country. Simultaneously, the ADR agents create a certificate which settles at
the Fund's custodian in five days. The Fund may also execute trades on the U.S.
markets using existing ADRs. A foreign issuer of the security underlying an ADR
is generally not subject to the same reporting requirements in the United States
as a domestic issuer. Accordingly the information available to a U.S. investor
will be limited to the information the foreign issuer is required to disclose in
its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign securities are
denominated in foreign currency.
MORTGAGE PASS-THROUGH SECURITIES. The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association ("GNMA"), are described
as "modified pass-through." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the mortgage pool, net
of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Administration-insured or Veteran's Administration
("VA")-guaranteed mortgages. These guarantees, however, do not apply to the
market value or yield of mortgage pass-through securities. GNMA securities are
often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages (i.e.,
mortgages not insured or guaranteed by any governmental agency) from a list of
approved seller/services which include state and federally-chartered savings and
loan associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates ("PCs") which
represent interest in conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment of
interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of mortgage loans. Such issuers may also be the originators
and/or servicers of the underlying mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may also buy mortgage-related securities without
insurance or guarantees.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
or "CMOs", which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by GNMA, FNMA or FHLMC, but also may be collateralized by
whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). The Fund may also
invest a portion of its assets in multiclass pass-through securities which are
equity interests in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States government or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. The issuer of a series of CMOS may elect to be treated as a Real
Estate Mortgage Investment Conduit (a "REMIC").
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranch", is issued at a specific fixed or floating coupon rate and has a stated
maturity or final distribution date. Principal prepayments on the Mortgage
Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates, resulting in a loss of all or a part of
the premium if any has been paid. Interest is paid or accrues on all classes of
the CMOs on a monthly, quarterly or semiannual basis. The principal of and
interest on the Mortgage Assets may be allocated among the several classes of a
series of a CMO in innumerable ways. In a common structure, payments of
principal, including any principal prepayments, on the Mortgage Assets are
applied to the classes of the series of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment of principal
will be made on any class of CMOs until all other classes having an earlier
stated maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest factor
of the underlying security). See "Stripped Mortgage-Backed Securities" below for
a discussion of the risks of investing in these stripped securities and of
investing in classes consisting primarily of interest payments or principal
payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date, but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS") which are derivative multiclass
mortgage securities issued by agencies or instrumentalities of the United States
government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks and
investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of Mortgage Assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
Class) while the other class will receive all of the principal (the
principal-only or "PO" Class). The yield to maturity on an IO is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Fund may fail to fully recoup its initial investment in these
securities. The market value of the class consisting primarily or entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established trading
markets for these securities have not yet developed, although the securities are
traded among institutional investors and investment banking firms.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to intermediate-
term debt securities whose maturity values or interest rates are determined by
reference to the values of one or more specified foreign currencies, and may
offer higher yields than U.S. dollar-denominated securities of equivalent
issuers. Currency-indexed securities may be positively or negatively indexed;
that is, their maturity value may increase when the specified currency value
increases, resulting in a security that performs similarly to a foreign-
denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics are
similar to a put on the underlying currency. Currency-indexed securities may
also have prices that depend on the values of a number of different foreign
currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap ageements may increase or decrease the Fund's
exposure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as securities prices or inflation rates. Swap agreements can take
many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
custodian with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will maintain cash or liquid assets with
a value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of the swap agreement would
be likely to decline, potentially resulting in losses. If the counterparty
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The Fund anticipates that it will
be able to eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting agreement with
the same or another counterparty.
OPTIONS: The Fund may write covered put and call options and purchase put and
call options on domestic and foreign fixed income securities that are traded on
U.S. and foreign securities exchanges and over-the-counter. Call options written
by the Fund give the holder the right to buy the underlying securities from the
Fund at a fixed exercise price; put options written by the Fund give the holder
the right to sell the underlying security to the Fund at a fixed exercise price.
A call option written by the Fund is "covered" if the Fund owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, high quality debt securities and short-term money market
instruments in a segregated account with its custodian. A put option written by
the Fund is "covered" if the Fund maintains cash, high quality debt securities
and short-term money market instruments with a value equal to the exercise price
in a segregated account with its custodian, or else holds a put on the same
security and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written. Put and call options written by the Fund may also be covered in such
other manner as may be in accordance with the requirements of the exchange on
which, or the counter party with which, the option is traded and applicable laws
and regulations. The writer of an option may have no control over when the
underlying securities must be sold, in the case of a call option, or purchased,
in the case of a put option, since with regard to certain options, the writer
may be assigned an exercise notice at any time prior to the termination of the
obligation.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or short-term
securities. Such transactions permit the Fund to generate additional premium
income, which will partially offset declines in the value of portfolio
securities or increases in the cost of securities to be acquired. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to, or concurrent with, the sale of the security.
The Fund will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option is less than the premium received from
writing the option or if the premium received in connection with the closing of
an option purchased is more than the premium paid for the original purchase.
Conversely, the Fund will suffer a loss if the premium paid or received in
connection with a closing transaction is more or less, respectively, than the
premium received or paid in establishing the option position. Because increases
in the market price of a call option will generally reflect increases in the
market price of the underlying security, any loss resulting from the closing out
of a call option would likely be offset in whole or in part by appreciation of
the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options with the
result that the Fund would have to exercise the options in order to realize any
profit. If the Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise. Reasons for
the absence of a liquid secondary market include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by a national securities exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments that call options are used in equivalent
buy-and-write transactions.
The Fund may write combinations of put and call options on the same security, a
practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event that
one of the options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Fund will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of a security remains
stable and neither the call nor the put is exercised. In an instance where one
of the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
The Fund may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
domestic or foreign securities that the Fund anticipates purchasing in the
future. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise of the option,
and, unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Fund.
YIELD CURVE OPTIONS: The Fund may also enter into options on the yield "spread"
or yield differential between two fixed income securities, a transaction
referred to as a "yield curve" option. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
fixed income securities, rather than the prices of the individual securities,
and is usually settled through cash payments. Accordingly, a yield curve option
is profitable to the holder if this differential widens (in the case of a call)
or narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the yield
spread between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The Fund may also purchase or write
yield curve options for other than hedging purposes if, in the judgment of the
Adviser, the Fund will be able to profit from movements in the spread between
the yields of the underlying fixed income securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss even
if the yield of one of the underlying securities remains constant, if the yield
spread moves in a direction or to an extent which was not anticipated. Yield
curve options written by the Fund will be covered. A call (or put) option
written by the Fund is covered if the Fund holds another call (or put) option on
the yield spread between the same two securities and maintains in a segregated
account with its custodian cash or cash equivalents sufficient to cover the
Fund's net liability under the two options. Therefore, the Fund's liability for
such a covered option is generally limited to the difference between the amount
of the Fund's liability under the option written by the Fund less the value of
the option held by the Fund. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the counter party
with which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed. Because these securities are traded over-the-counter, the SEC has
taken the position that yield curve options are illiquid and, therefore, cannot
exceed the SEC illiquidity ceiling. See "Investment Techniques -- Options on
Securities" in the Prospectus for a discussion of the policies the Adviser
intends to follow to limit the Fund's investment in these securities.
FUTURES CONTRACTS: The Fund may enter into contracts for the future delivery of
domestic or foreign fixed income securities or contracts based on municipal bond
or other financial indices including any index of domestic or foreign fixed
income securities, as such contracts become available for trading ("Futures
Contracts"). Such transactions may be entered into for hedging purposes and for
non-hedging purposes, subject to applicable law. A "sale" of a Futures Contract
means a contractual obligation to deliver the securities called for by the
contract at a specified price in a fixed delivery month or, in the case of a
Futures Contract on an index of securities, to make or receive a cash
settlement. A "purchase" of a Futures Contract means a contractual obligation to
acquire the securities called for by the contract at a specified price in a
fixed delivery month or, in the case of a Futures Contract on an index of
securities, to make or receive a cash settlement. U.S. Futures Contracts have
been designed by exchanges which have been designated as "contract markets" by
the Commodity Futures Trading Commission (the "CFTC"), and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market. Existing contract markets include the Chicago
Board of Trade and the International Monetary Market of the Chicago Mercantile
Exchange. Futures Contracts are traded on these markets, and, through their
clearing corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange. Futures Contracts purchased or
sold by the Fund are also traded on foreign exchanges which are not regulated by
the CFTC.
At the same time a Futures Contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The initial deposit
varies but may be as low as 5% or less of the value of the contract. Daily
thereafter, the Futures Contract is valued and the Fund may be required to pay
or receive additional payment of "variation margin" based on changes in the
value of the contract.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities called for
by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a municipal bond
index Futures Contract, provides for a cash payment equal to the amount, if any,
by which the value of the index at maturity is above or below the value of the
index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a broad
based index of securities designed to reflect movements in the relevant market
as a whole. The index assigns weighted values to the securities included in the
index and its composition is changed periodically.
Although Futures Contracts call for the actual delivery of securities or, in the
case of Futures Contracts based on an index, the making or acceptance of a cash
settlement at a specified future time, the contractual obligation is usually
fulfilled before such date by buying or selling, as the case may be, on a
commodities exchange, an identical Futures Contract calling for settlement in
the same month, subject to the availability of a liquid secondary market. The
Fund incurs brokerage fees when it purchases and sells Futures Contracts.
The purpose of the purchase or sale of a Futures Contract for hedging purposes,
in the case of a portfolio such as that of the Fund which holds or intends to
acquire long-term fixed income securities, is to attempt to protect the Fund
from fluctuations in interest rates without actually buying or selling long-term
fixed income securities. For example, if the Fund owns long-term bonds and
interest rates were expected to increase, the Fund might enter into Futures
Contracts for the sale of debt securities. Such a sale would have much the same
effect as selling an equivalent value of the long-term bonds in the portfolio of
the Fund by the Fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Futures
Contracts would increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Fund could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase. However, since the futures market is more liquid than the cash market,
the use of Futures Contracts as an investment technique allows the Fund to
maintain a hedging position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Fund could then buy long-term bonds on the
cash market. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of cash
or short-term money market instruments from its portfolio in an amount equal to
the difference between the fluctuating market value of such Futures Contracts
and the aggregate value of the initial deposit and variation margin payments
made by the Fund with respect to such Futures Contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the Adviser's investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio, and interest rates decrease instead, the Fund will lose part or all
of the benefit of the increased value of its bonds which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell bonds from
its portfolio to meet daily variation margin requirements. Such sales of bonds
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so. The purchase and sale of Futures Contracts for
non-hedging purposes involves greater risk, and could result in losses which are
not offset by gains on other portfolio assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on Futures
Contracts ("Options on Futures Contracts") for hedging purposes and for
non-hedging purposes subject to applicable laws. An Option on a Futures Contract
provides the holder with the right to enter into a "long" position in the
underlying Futures Contract in the case of a call option, or a "short" position
in the underlying Futures Contract in the case of a put option, at a fixed
exercise price up to a stated expiration date or, in the case of certain
options, on such date. Such Options on Futures Contracts will be traded on U.S.
contract markets regulated by the CFTC as well as on foreign exchanges.
Depending on the pricing of the option compared to either the price of the
Futures Contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the Futures
Contract or underlying debt securities. As with the purchase of Futures
Contracts, when the Fund is not fully invested it may purchase a call Option on
a Futures Contract to hedge against a market advance due to declining interest
rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the securities which are deliverable upon exercise
of the Futures Contract. If the futures price at expiration of the option is
below the exercise price, the Fund will retain the full amount of the option
premium, less related transaction costs, which provides a partial hedge against
any decline that may have occurred in the Fund's portfolio holdings. The writing
of a put Option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities which are deliverable upon exercise of the
Futures Contract. If the futures price at expiration of the option is higher
than the exercise price, the Fund will retain the full amount of the option
premium, less related transaction costs, which provides a partial hedge against
any increase in the price of securities which the Fund intends to purchase. If a
put or call option the Fund has written is exercised, the Fund will incur a loss
which will be reduced by the amount of the premium it receives, less related
transaction costs. Depending on the degree of correlation between changes in the
value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities. The writer of an Option on a Futures Contract is subject to the
requirement of initial and variation margin payments. The Fund may cover the
writing of call Options on Futures Contracts through purchases of the underlying
Futures Contract or through ownership of the security or securities included in
the index underlying the Futures Contract. The Fund may also cover the writing
of call Options on Futures Contracts through the purchase of such Options,
provided that the exercise price of the call purchased (a) is equal to or less
than the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
high quality debt securities or short-term money market instruments in a
segregated account with the Fund's custodian. The Fund will cover the writing of
put Options on Futures Contracts through sales of the underlying Futures
Contract or through segregation of cash, high quality debt securities or
short-term money market instruments in an amount equal to the value of the
security or index underlying the Futures Contract. The Fund may also cover the
writing of put Options on Futures Contracts through the purchase of such
Options, provided that the exercise price of the put purchased is equal to or
greater than the exercise price of the put written. In addition, the Fund may
cover put and call Options on Futures Contracts in accordance with the
requirements of the exchange on which the option is traded and applicable laws
and regulations.
The purchase of a put Option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. The Fund will
purchase a put Option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the option
and close out the underlying Futures Contract. In addition to the correlation
risks discussed above, the purchase of an option also entails the risk that
changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option purchased. The writer of an option or a
futures contract is subject to all the risks of futures trading including the
requirement of initial and variation margin payments. The purchase and sale of
Options on Futures Contracts for non-hedging purposes involves greater risk, and
could result in losses which are not offset by gains of other portfolio assets.
FORWARD CONTRACTS: The Fund may enter into contractual obligations to purchase
or sell a specific quantity of a given foreign currency for a fixed exchange
rate at a future date ("Forward Contracts"). Forward Contracts are individually
negotiated and are traded through the "interbank currency market", an informal
network of banks and brokerage firms which operates around the clock and
throughout the world. Transactions in the interbank market may be executed only
through financial institutions acting as market- makers in the interbank market
or through brokers executing purchases and sales through such institutions.
Market-makers in the interbank market generally act as principals in taking the
opposite side of their customers' positions in Forward Contracts and ordinarily
charge a mark-up or commission which may be included in the cost of the
contract. In addition, market-makers may require their customers to deposit
collateral upon entering into a Forward Contract as security for the customer's
obligation to make or receive delivery of currency and to deposit additional
collateral if exchange rates move adversely to the customer's position. Such
deposits may function in a manner similar to the margining of Futures Contracts
described above.
Prior to the stated maturity date of a Forward Contract, it may be possible to
liquidate the transaction by entering into an offsetting contract. In order to
do so, however, a customer may be required to maintain both contracts as open
positions until maturity and to make or receive a settlement of the difference
owed to or from the market-maker or broker at that time.
Forward Contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the Fund
than if it had not engaged in such contracts.
The Fund has established procedures consistent with Statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high grade debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts entered into by the Fund. The Fund
may also enter into Forward Contracts for "Cross-hedging" as noted in the
Prospectus.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
Forward Contracts will be utilized. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put options on the foreign currency.
If the value of the currency does decline, the Fund will have the right to sell
such currency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates,
it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised and the diminution in value of portfolio securities will be
offset by the amount of the premium received, less related transaction costs.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium, less related transaction costs. As in the
case of other types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the premium,
less related transaction costs, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Fund also may be required to forego all or a portion
of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
Options on foreign currencies written or purchased by the Fund will be traded
over-the-counter or on U.S. or foreign securities exchanges. All options written
on foreign currencies will be covered. A call option written on foreign
currencies by the Fund is "covered" if the Fund owns the underlying foreign
currency covered by the call or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if the Fund has a call on the same foreign currency and
in the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A put option
written on foreign currencies by the Fund is "covered" if the Fund maintains
cash, short-term money market instruments or high quality debt securities with a
value equal to the exercise price in a segregated account with its custodian, or
else holds a put on the same foreign currency and in the same principal amount
as the put written where the exercise price of the put held is equal to or
greater than the exercise price of the put written. Options on foreign
currencies written by the Fund may also be covered in such other manner as may
be in accordance with the requirements of the exchange on which the option is
traded and applicable laws and regulations.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON FUTURES
CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES: Various
additional risks exist with respect to the trading of options, Futures Contracts
and Forward Contracts. For example, the Fund's ability effectively to hedge all
or a portion of its portfolio through transactions in such instruments will
depend on the degree to which price movements in the underlying index or
instrument correlate with price movements in the relevant portion of the Fund's
portfolio. The trading of futures and options entails the additional risk of
imperfect correlation between movements in the futures or option price and the
price of the underlying index or obligation, while the trading of options also
entails the risk of imperfect correlation between securities used to cover
options written and the securities underlying such options. The anticipated
spread between the prices may be distorted because of various factors, which are
set forth under "Investment Objective, Policies and Restrictions -- Futures
Contracts" above. When the Fund purchases or sells Futures Contracts based on an
index of securities, the securities comprising such index will not be the same
as the portfolio securities being hedged, thereby creating a risk that changes
in the value of the index will not correlate with changes in the value of such
portfolio securities.
The Fund's ability to engage in options and futures strategies will also depend
on the availability of liquid markets in such instruments. "Investment
Objective, Policies and Restrictions -- Options" sets forth certain reasons why
a liquid secondary market may not exist.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits", established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit. In addition,
the exchanges on which futures and options are traded may impose limitations
governing the maximum number of positions on the same side of the market and
involving the same underlying instrument which may be held by a single investor,
whether acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written in one
or more accounts or through one or more brokers).
Unlike transactions in Futures Contracts entered into by the Fund, options on
foreign currencies and Forward Contracts are not traded on contract markets
regulated by the CFTC or, with the exception of certain foreign currency
options, by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange, subject to SEC regulation. Similarly, options on
securities may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of Forward Contracts could
lose amounts substantially in excess of their initial investments due to the
margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities and options traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all options on securities and on foreign currencies entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may be more readily available than in
the over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
In addition, options on securities, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies may be traded on
foreign exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or securities.
The value of such positions also could be adversely affected by (i) other
complex foreign, political and economic factors, (ii) lesser availability than
in the United States of data on which to make trading decisions, (iii) delays in
the Fund's ability to act upon economic events occuring in foreign markets
during non-business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (v) lesser trading volume.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in foreign currencies. The Fund may also be required to receive
delivery of the foreign currencies underlying options on foreign currencies or
Forward Contracts it has entered into. This could occur, for example, if an
option written by the Fund is exercised or the Fund is unable to close out a
Forward Contract it has entered into. In addition, the Fund may elect to take
delivery of such currencies. Under such circumstances, the Fund may promptly
convert the foreign currencies into dollars at the then current exchange rate.
Alternatively, the Fund may hold such currencies for an indefinite period of
time if the Adviser believes that the exchange rate at the time of delivery is
unfavorable or if, for any other reason, the Adviser anticipates favorable
movements in such rates.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Fund to
risk of loss if such rates move in a direction adverse to a Fund's position.
Such losses could also adversely affect the Fund's hedging strategies. Certain
tax requirements may limit the extent to which the Fund will be able to hold
currencies.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange or members of the Federal Reserve System, recognized primary U.S.
Government securities dealers or institutions which the Adviser has determined
to be of comparable creditworthiness. The securities that the Fund purchases and
holds through its agent are U.S. Government securities, the values of which are
equal to or greater than the repurchase price agreed to be paid by the seller.
The repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made only to member
firms of the New York Stock Exchange (and subsidiaries thereof) and member banks
of the Federal Reserve System, and would be required to be secured continuously
by collateral in cash, U.S. Treasury securities, or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan and
obtain the securities loaned at any time on customary industry settlement notice
(which will not usually exceed five days). For the duration of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation from the
investment of cash collateral or a fee. The Fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but the Fund would call the loan in anticipation of an important vote to
be taken among holders of the securities or of the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovery or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing, and when, in the judgment of the Adviser, the consideration which
can be earned currently from securities loans of this type justifies the
attendant risk. If the Adviser determines to make securities loans, it is
intended that the value of the securities loaned would not exceed 30% of the
value of the Fund's total assets.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions. During the roll period, the
Fund foregoes principal and interest paid on the mortgage-backed securities. The
Fund is compensated for the lost interest by the difference between the current
sales price and the lower price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. The Fund may also be compensated by receipt of a commitment fee.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an instrument in such a
security.
PORTFOLIO TRADING: The portfolio of the Fund will be fully managed by buying and
selling securities, as well as by holding selected securities to maturity. The
Fund will seek to maximize the return on its portfolio by taking advantage of
market developments, yield disparities and variations in the creditworthiness of
issuers. The portfolio management of the Fund may include use of the following
strategies:
(1) varying the maturity mix or quality profile of its portfolio as
warranted by overall market expectations;
(2) selling one type of debt security (e.g., industrial bonds) and buying
another (e.g., utility bonds) when disparities arise in their relative values
and prospects;
(3) changing from one debt security to a similar debt security when their
respective yields are distorted due to market factors; and
(4) changing from one debt security to a similar debt security based upon
credit analysis and fundamental research.
These strategies may result in increases or decreases in the current income of
the Fund available for distribution to its shareholders and in its holdings of
debt securities which sell at moderate to substantial premiums or discounts from
face value. If the Fund's expectations of changes in interest rates or its
evaluation of the normal yield relationship between two securities proves to be
incorrect, the income, net asset value and potential capital gain may be reduced
or its potential capital loss may be increased.
The Fund will engage in portfolio trading if it believes a transaction net of
costs (including custodian charges) will help in attaining its investment
objective. See "Portfolio Transactions and Brokerage Commissions."
To be eligible to be taxed under the provisions of the Internal Revenue Code
applicable to regulated investment companies, the Fund must, among other things,
limit its short-term trading so that less than 30% of its gross income is
derived from gains realized on the sale or other disposition of securities held
for less than three months. For this purpose, gross income includes all dividend
and interest income and gross realized capital gains, both short and long-term,
without offset for realized capital losses.
The investment objective and policies described above may be changed without
shareholder approval.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of its
shares (which, as used in this SAI, means the lesser of (i) more than 50% of the
outstanding shares of the Trust (or a series or class, as applicable), or (ii)
67% or more of the outstanding shares of the Trust (or a series or class, as
applicable) present at a meeting if holders of more than 50% of the outstanding
shares of the Trust (or a series or class, as applicable) are represented in
person or by proxy).
The Fund may not:
(1) Borrow amounts in excess of 10% of its gross assets, and then only as a
temporary measure for extraordinary or emergency purposes, or pledge, mortgage
or hypothecate its assets taken at market value to an extent greater than 15%
of its gross assets, in each case taken at the lower of cost or market value
and subject to a 300% asset coverage requirement (for the purpose of this
restriction, collateral arrangements with respect to options on fixed income
securities, Futures Contracts, Options on Futures Contracts, Forward Contracts
and options on foreign currencies and payments of initial and variation margin
in connection therewith are not considered a pledge of assets).
(2) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security.
(3) Invest more than 25% of the market value of its total assets in
securities of issuers in any one industry, except that up to 40% of the Fund's
total assets, taken at market value, may be invested in each of the electric
utility and telephone industries.
(4) Purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except Futures Contracts, Options on Futures Contracts, Forward Contracts and
options on foreign currencies) in the ordinary course of the business of the
Fund. The Fund reserves the freedom of action to hold and to sell real estate
acquired as a result of the ownership of securities.
(5) Make loans to other persons except through the lending of its portfolio
securities in accordance with, and to the extent permitted by, its investment
objective and policies and except through repurchase agreements. Not more than
10% of the Fund's assets will be invested in repurchase agreements maturing in
more than seven days. For these purposes the purchase of commercial paper or
of all or a portion of a private or public issue of debt securities shall not
be considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of the total assets of the Fund taken at
market value to be invested in the securities of such issuer, other than
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, and provided further that up to 25% of the total assets of
the Fund may be invested in securities issued or guaranteed by any foreign
government, its agencies or instrumentalities.
(7) Purchase voting securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the outstanding voting securities of
such issuer to be held by the Fund; or purchase securities of any issuer if
such purchase at the time thereof would cause more than 10% of any class of
securities of such issuer to be held by the Fund. For this purpose all
indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class.
(8) Invest for the purpose of exercising control or management.
(9) Purchase securities issued by any registered investment company except
by purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open market,
is part of a plan of merger or consolidation; provided, however, that the Fund
shall not purchase the securities of any registered investment companies if
such purchase at the time thereof would cause more than 10% of the Fund's
total assets, taken at market value, to be invested in the securities of such
issuers; and provided, further, that the Fund shall not purchase securities
issued by any open-end investment company.
(10) Invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation.
(11) Purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an officer
or Trustee of the Fund, or is a partner, officer, director or trustee of the
investment adviser of the Fund, if after the purchase of the securities of
such issuer by the Fund one or more of such persons owns beneficially more
than 1/2 of 1% of the shares or securities, or both, all taken at market
value, of such issuer, and such persons owning more than 1/ 2 of 1% of such
shares or securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value.
(12) Purchase any securities or evidences of interest therein on margin
except to make deposits on margin in connection with options on fixed income
securities, Futures Contracts, Options on Futures Contracts, Forward Contracts
and options on foreign currencies, and, except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities and provided that this shall not prevent the purchase,
ownership, holding or sale of contracts for the future acquisition or delivery
of fixed income securities.
(13) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities without payment of further consideration equivalent in kind and
amount to the securities sold and provided that if such right is conditional
the sale is made upon the same conditions.
(14) Purchase or sell any put or call options or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or sale
of warrants where the grantor of the warrants is the issuer of the underlying
securities or the writing, purchasing and selling of puts, calls or
combinations thereof with respect to securities, Futures Contracts and foreign
currencies.
As a matter of non-fundamental policy, the Fund may not invest in securities
(other than repurchase agreements) which are restricted as to disposition under
the federal securities laws (unless the Board of Trustees has determined that
such securities are liquid based upon trading markets for the specific
security), if more than 15% of the Fund's assets would be invested in such
securities.
These investment restrictions are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the investment management, and the officers of
the Fund are responsible for its operations. The Fund's Trustees and officers
are listed below, together with their principal occupations during the past five
years. (Their titles may have varied during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private investor; Massachusetts Financial Services Company, former Chairman
and Director (prior to September 30, 1991); Cambridge Bancorp, Director;
Cambridge Trust Company, Director
PETER G. HARWOOD
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (prior to December 1991); The Neiman Marcus Group,
Inc., Vice Chairman and Chief Financial Officer (prior to February, 1992)
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT
Private investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
JOAN S. BATCHELDER,* Vice President
Massachusetts Financial Services Company, Senior Vice President
CYNTHIA M. BROWN,* Vice President
Massachusetts Financial Services Company, Senior Vice President
MATTHEW N. FONTAINE,* Vice President
Massachusetts Financial Services Company, Assistant Vice President
ROBERT J. MANNING,* Vice President
Massachusetts Financial Services Company, Senior Vice President
BERNARD SCOZZAFAVA,* Vice President
Massachusetts Financial Services Company, Vice President
JAMES T. SWANSON,* Vice President
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
- ----------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a wholly owned
subsidiary is the investment adviser or distributor. Mr. Brodkin, the Chairman
of MFD, Messrs. Shames and Scott, Directors of MFD and Mr. Cavan, the
Secretary of MFD, hold similar positions with certain other MFS affiliates.
Mr. Bailey is a Director of Sun Life Assurance Company of Canada (U.S.) ("Sun
Life of Canada (U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $2,500 per year plus $235 per meeting and $100 per
committee meeting attended together with such Trustees' out-of-pocket expenses.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if the
Trustee has completed at least 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 73 and receive
reduced payments if he has completed at least 5 years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for Messrs. Brodkin, Scott and
Shames. The Fund will accrue its allocable share of compensation expenses each
year to cover current year's service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
As of April 30, 1996, all Trustees and officers as a group owned less than 1% of
shares outstanding on that date. As of April 30, 1996, Nationwide Life Insurance
Co., MFS Variable Account, c/o IPO CO 51, P.O. Box 182,029, Columbus, OH
43218-2029 was the record owner of approximately 5.58% of the outstanding shares
of Class A shares of the Fund. As of April 30, 1996, Merrill Lynch, Pierce,
Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL 32232-5286, was the record
owner of approximately 6.57% of the outstanding Class B shares of the Fund. As
of April 30, 1996, Merrill Lynch, Pierce, Fenner & Smith Inc., P.O. Box 45286,
Jacksonville, FL 32232-5286, was the record owner of approximately 16.44% of the
outstanding Class C shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
May 20, 1987, as amended (the "Advisory Agreement"). The Adviser provides the
Fund with overall investment advisory and administrative services, as well as
general office facilities. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund.
For these services and facilities, under the Advisory Agreement, the Adviser
receives a management fee computed and paid monthly, on the basis of a formula
based upon a percentage of the average daily net assets of the Fund plus a
percentage of the gross income (i.e., income other than gains from the sale of
securities) of the Fund, in each case on an annualized basis for the
then-current fiscal year. The applicable percentages are reduced as assets and
income reach the following levels:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
- ------------------------------------ --------------------------------
0.220% of the first $200 million 3.00% of the first $22 million
0.187% of average daily net assets 2.55% of gross income in excess
in excess of $200 million of $22 million
For the fiscal years ended January 31, 1994, 1995 and 1996 MFS received
management fees under the Advisory Agreement of $3,284,878, $3,756,072 and
$4,031,708, respectively.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expense, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or recission of the various state requirements. Any such adjustment would not
become effective until the beginning of the Fund's next fiscal year following
the date of such amendments or the date on which such requirements become no
longer applicable.
The Fund pays all of its expenses (other than those assumed by MFS or MFD)
including: Trustee fees (discussed above); governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar and dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares; expenses of preparing, printing and mailing
share certificates, shareholder reports, notices, proxy statements and reports
to governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of the Fund's custodian, for all services
to the Fund, including safekeeping of funds and securities and maintaining
required books and accounts; expenses of calculating the net asset value of
shares of the Fund; and expenses of shareholder meetings. Expenses relating to
the issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses for such purposes are borne by
the Fund except that its Distribution Agreement with MFD, the Fund's
Distributor, requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific series
are allocated among the series in a manner believed by management of the Trust
to be fair and equitable. For a list of the Fund's expenses, including the
compensation paid to the Trustees who are not officers of MFS, during the fiscal
year ended January 31, 1996, see "Statement of Operations" in the Fund's Annual
Report to shareholders incorporated by reference into this SAI.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the investments of the Fund, effecting the portfolio
transactions of the Fund, and, in general, administering the affairs of the
Fund.
The Advisory Agreement will remain in effect until August 1, 1996 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding shares (as defined under "Investment Restrictions") and, in
either case, by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party. The Advisory Agreement
terminates automatically if it is assigned and may be terminated without penalty
by vote of a majority of the shares of the Fund (as defined in "Investment
Restrictions") or by either party to the Agreement on not more than 60 days' nor
less than 30 days' written notice. If MFS ceases to serve as the Adviser to the
Fund, the Fund will change its name so as to delete the term "MFS". The Advisory
Agreement provides that the Adviser may render services to others and may permit
clients in addition to the Fund to use the term "MFS" in their names. The
Advisory Agreement further provides that neither the Adviser nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution and
management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent for the
Fund. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective August 1, 1985 (the "Agency
Agreement") with the Trust. The Shareholder Servicing Agent's responsibilities
under the Agency Agreement include administering and performing transfer agent
functions and the keeping of records in connection with the issuance, transfer
and redemption of each class of shares of the Fund. For these services, the
Shareholder Servicing Agent will receive a fee calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15%, up to 0.22% and up to 0.15% of assets attributable to Class A,
Class B and Class C shares, respectively. In addition, the Shareholder Servicing
Agent will be reimbursed by the Fund for certain expenses incurred by the
Shareholder Servicing Agent on behalf of the Fund. State Street Bank and Trust
Company, the dividend and distribution disbursing agent of the Fund, has
contracted with the Shareholder Servicing Agent to administer and perform
certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated
January 1, 1995, as amended (the "Distribution Agreement"). Prior to January 1,
1995, MFS Financial Services, Inc. ("FSI"), another wholly owned subsidiary of
MFS, was the Fund's distributor. Where this SAI refers to MFD in relation to the
receipt or payment of money with respect to a period or periods prior to January
1, 1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" in this SAI). A
group might qualify to obtain quantity sales charge discounts (see "Investment
and Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of offering price or as a percentage of the net amount invested
as listed in the Prospectus. In the case of the maximum sales charge, the dealer
retains 4% and MFS retains approximately 3/4 of 1% of the public offering price.
MFD, on behalf of the Fund, pays a commission to dealers who initiate and are
responsible for purchases of $1 million or more as described in the Prospectus.
CLASS B AND CLASS C SHARES: MFD acts as agent in selling Class B and Class C
shares of the Fund to dealers. The public offering price of Class B and Class C
shares is their net asset value next computed after the sale (see "Purchases" in
the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
For the Fund's fiscal year ended January 31, 1996, MFD received sales charges of
$136,238 and dealers received sales charges of $655,338 (as their concession on
gross sales charges of $791,576) for selling Class A shares of the Fund; the
Fund received $71,221,902 representing the aggregate net asset value of such
shares. For the Fund's fiscal year ended January 31, 1995, MFD received sales
charges of $105,333 and dealers received sales charges of $612,900 (as their
concession on gross sales charges of $718,233) for selling Class A shares of the
Fund; the Fund received $80,688,929 representing the aggregate net asset value
of such shares. For the Fund's fiscal year ended January 31, 1994, MFD received
sales charges of $160,262 and dealers received sales charges of $946,284 (as
their concession on gross sales charges of $1,106,546) for selling Class A
shares of the Fund; the Fund received $98,444,425 representing the aggregate net
asset value of such shares.
For the Fund's fiscal year ended January 31, 1996 and 1995, the CDSC imposed on
redemption of Class A shares was $1,729 and $303, respectively.
For the Fund's fiscal year ended January 31, 1996 and 1995 and for the period
September 7, 1993 through January 31, 1994, the CDSC imposed on redemption of
Class B shares was $490,067, $578,443 and $322,272, respectively.
The Distribution Agreement will remain in effect until August 1, 1996, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio manager who is an employee of the Adviser. Changes in the investments
of the Fund are reviewed by the Board of Trustees. The Fund's portfolio manager
may serve other clients of the Adviser or any subsidiary of the Adviser in a
similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in which, and the broker-dealers through which, it seeks this
result. Debt securities are traded principally in the over-the-counter market on
a net basis through dealers acting for their own account and not as brokers. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased and
sold from and to dealers include a dealer's mark-up or markdown. The Adviser
normally seeks to deal directly with the primary market makers unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities may, as authorized by
the Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. From
time to time soliciting dealer fees may be available to the Adviser on the
tender of the Fund's portfolio securities in so-called tender or exchange
offers. Such soliciting dealer fees will be in effect recaptured by the Fund to
the extent possible. At present no other recapture arrangements are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. (the "NASD"), and such
other policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund and of the other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
During the fiscal years ended January 31, 1994, 1995 and 1996, the Fund paid
total brokerage commissions (which term includes underwriters' concessions on
new issues of fixed income securities) of $38,422, $14,184 and $2,900,
respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Fund's prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any of
the classes of other MFS Funds or MFS Fixed Fund within a 13-month period (or
36-month period for purchases of $1 million or more), the shareholder may obtain
Class A shares of the Fund at the same reduced sales charge as though the total
quantity were invested in one lump sum by completing the Letter of Intent
section of the Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13-months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter of Intent. Neither income dividends
nor capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all holdings of
all classes of shares of that shareholder in the MFS Funds or MFS Fixed Fund
reaches a discount level. (See "Purchases" in the Prospectus for the sales
charges on quantity purchases.) For example, if a shareholder owns shares valued
at $75,000 and purchases an additional $25,000 of Class A shares of the Fund,
the sales charge for the $25,000 purchase would be at the rate of 4% (the rate
applicable to single transactions of $100,000). A shareholder must provide the
Shareholder Servicing Agent (or his investment dealer must provide MFD) with
information to verify that the quantity sales charge discount is applicable at
the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of net investment income and
capital gains made by the Fund with respect to a particular class of shares may
be automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (without a sales charge) and not subject to any CDSC. Distributions
will be invested at the close of business on the payable date for the
distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP generally are limited to 10% of the value of the account at the time of
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in the
following order: (i) to the extent necessary, any "Free Amount"; (ii) any
"Reinvested Shares"; and (iii) to the extent necessary the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B and Class C shares pursuant to a SWP but will not be
waived in the case of SWP redemptions of Class A shares. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the number
of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be reinvested in additional full
and fractional shares of the Fund at the net asset value in effect at the close
of business on the record date for such distributions. To initiate this service,
shares generally having an aggregate value of at least $5,000 either must be
held on deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and the imposition of a
CDSC on certain redemptions. The shareholder may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent,) obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds, if available for sale, under the Automatic Exchange Plan, a
dollar cost averaging program. The Automatic Exchange Plan provides for
automatic exchanges of funds from the share- holder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to four different funds effective on the seventh day of each
month or of every third month, depending whether monthly or quarterly exchanges
are elected by the shareholder. If the seventh day of the month is not a
business day, the transaction will be processed on the next business day.
Generally, the initial exchange will occur after receipt and processing by the
Shareholder Servicing Agent of an application in good order. Exchanges will
continue to be made from a shareholder's account in any MFS Fund, as long as the
balance of the account is sufficient to complete the exchanges. Additional
payments made to a shareholder's account will extend the period that exchanges
will continue to be made under the Automatic Exchange Plan. However, if
additional payments are added to an account subject to the Automatic Exchange
Plan shortly before an exchange is scheduled, such funds may not be available
for exchanges until the following month; therefore, care should be used to avoid
inadvertently terminating the Automatic Exchange Plan through exhaustion of the
account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanged shares of MFS Money Market Fund and
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where the
shares are acquired through direct purchase or reinvested dividends) who have
redeemed their shares have a one-time right to reinvest the redemption proceeds
in the same class of shares of any of the MFS Funds (if shares of the fund are
available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within 90
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited with any CDSC paid are then redeemed within six years of
the initial purchase or within 12-months of the initial purchase in the case of
Class C shares and certain Class A shares, such CDSC will be imposed upon
redemption. Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be considered
a "wash sale" and may result in the inability to recognize currently all or a
portion of any loss realized on the original redemption for federal income tax
purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below and unless
otherwise noted in the Prospectus of any of the other MFS Funds, some or all of
the shares in an account with the Fund for which payment has been received by
the Fund (i.e., an established account), may be exchanged for shares of the same
class of any of the other MFS Funds at net asset value (if shares of the fund
are available for sale). In addition, Class C shares may be exchanged for shares
of MFS Money Market Fund at net asset value. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") for an
established account are received by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 or all the shares in the account (except that the minimum is $50
for accounts of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent). Each
exchange involves the redemption of the shares of the Fund to be exchanged and
the purchase at the net asset value (i.e., without a sales charge) of the shares
of the same class of the other MFS Fund. Any gain or loss on the redemption of
the shares exchanged is reportable on the shareholder's federal income tax
return, unless both the shares received and the shares surrendered in the
exchange are held in a tax-deferred retirement plan or other tax-exempt account.
No more than five exchanges may be made in any one Exchange Request by
telephone. If the Exchange Request is received by the Shareholder Servicing
Agent prior to the close of regular trading on the Exchange, the exchange
usually will occur on that day if all of the requirements set forth above have
been complied with at the time. However, payment of the redemption proceeds by
the Fund, and thus purchase of shares of the other MFS Fund, may be delayed for
up to seven days if the Fund determines that such a delay would be in the best
interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges, although liability for the CDSC is carried
forward to the exchanged shares. For purposes of calculating the CDSC upon
redemption of shares acquired in an exchange, the purchase of shares acquired in
one or more exchanges is deemed to have occurred at the time of the original
purchase of the exchanged shares. Any gain or loss on the redemption of the
shares exchanged is reportable in the shareholders federal income tax return,
unless such shares were held in a tax-deferred retirement plan.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder should obtain and read the prospectus
of the other MFS Fund and consider the differences in objectives and policies
before making any exchange. Shareholders in the other MFS Funds (except holders
of shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund acquired through direct purchase and dividends
reinvested prior to June 1, 1992) have the right to exchange their shares for
shares of the Fund, subject to the conditions, if any, set forth in their
respective prospectuses. In addition, unitholders of the MFS Fixed Fund have the
right to exchange their units (except units acquired through direct purchases)
for shares of the Fund, subject to the conditions, if any, imposed upon such
unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state- specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discon- tinued
and is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non- employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986 (the "Code"), as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents and forms provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under Internal Revenue Code section 401(a) or 403(b) if the retirement
plan and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k)
Plan or another similar 401(a) or 403(b) recordkeeping program made available by
the Shareholder Servicing Agent.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains in accordance with the timing requirements imposed by the Code, it is
expected that the Fund will not be required to pay any federal income or excise
taxes, although the Fund's foreign-source income may be subject to foreign
withholding taxes. If the Fund should fail to qualify as a "regulated investment
company" in any year, the Fund would incur a regular corporate federal income
tax upon its taxable income and Fund distributions would generally be taxable as
ordinary dividend income to the shareholders. As long as it qualifies as a
"regulated investment company" under the Code, the Fund will not be required to
pay Massachusetts income or excise taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains, whether paid in cash or reinvested in additional
shares, are taxable to the Fund's shareholders as ordinary income for federal
income tax purposes. Because the Fund's income will consist primarily of
interest, its distributions are not, for the most part, expected to be eligible
for the dividends received deduction for corporations. Distributions from net
capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses), whether paid in cash or reinvested in additional
shares, are taxable to shareholders as long-term capital gains for federal
income tax purposes without regard to the length of time shareholders have owned
their shares. Fund dividends declared in October, November or December to
shareholders of record in such a month and paid the following January will be
taxable to shareholders as if received on December 31 of the year in which the
dividends are declared. The Fund will notify its shareholders regarding the tax
status of its distributions.
Any Fund distribution of net capital gains or net short-term capital gains will
have the effect of reducing the per share net asset value of shares in the Fund
by the amount of the distribution. Shareholders purchasing shares shortly before
the record date of any such distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a redemption of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a redemption of shares may also be disallowed under rules relating
to wash sales. Gain may be increased (or loss reduced) upon a redemption of
Class A shares of the Fund within ninety days after their purchase followed by
any purchase without payment of an additional sales charge (including purchases
by exchange or by reinvestment) of Class A shares of the Fund or of another MFS
Fund (or any other shares of an MFS Fund generally sold subject to a sales
charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon securities, certain stripped securities, securities
calling for deferred interest or payment of interest in-kind and certain
securities purchased at a market discount will cause the Fund to recognize
income prior to the receipt of cash payments with respect to these securities.
In order to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Fund. An investment in residual interests of a CMO that has elected to be
treated as a real estate mortgage investment conduit, or "REMIC," can create
complex tax problems, especially if the Fund has state or local governments or
other tax-exempt organizations as investors.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of distributions to shareholders. For example, certain positions held by the
Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on such day, and any gain or loss associated
with such positions will be treated as 60% long-term and 40% short-term capital
gain or loss. Certain positions held by the Fund that substantially diminish its
risk of loss with respect to other positions in its portfolio may constitute
"straddles," which are subject to special tax rules that may cause deferral of
Fund losses, adjustments in the holding periods of Fund securities and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles which could alter the effects of these rules. The Fund will
limit its activities in options, Futures Contracts, Forward Contracts, and swaps
and related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding of foreign currencies and
investment by the Fund in certain "passive foreign investment companies" may be
limited in order to avoid imposition of a tax on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Fund does not expect to be able
to pass through to shareholders foreign tax credits with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Fund to a reduced rate of tax or an exemption
from tax on such income; the Fund intends to operate so as to qualify for treaty
reduced rates where available. It is not possible, however, to determine the
Fund's effective rate of foreign tax in advance since the amount of the Fund's
assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on any dividends and
other payments made to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons may
also be subject to tax under the laws of their own jurisdiction. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. However, backup withholding will not be applied to payments that
have been subject to 30% withholding.
Fund distributions that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but generally not
from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the portion of its dividends that consists of such interest. Shareholders are
urged to consult their tax advisers regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more series and to divide or combine the shares of any series into a greater or
lesser number of shares without thereby changing the proportionate beneficial
interests in that series. The Trustees have currently authorized shares of the
Fund and one other series. The Declaration of Trust further authorizes the
Trustees to classify or reclassify any series of shares into one or more
classes. Pursuant thereto, the Trustees have authorized the issuance of three
classes of shares of the Fund, Class A, Class B and Class C shares. Each share
of a class of the Fund represents an equal proportionate interest in the assets
of the Fund allocable to that class. Upon liquidation of the Fund, shareholders
of each class are entitled to share pro rata in the net assets of the Fund
attributable to that class available for distribution to shareholders. The Trust
has reserved the right to create and issue additional series or classes of
shares, in which case the shares of each class of a series would participate
equally in the earnings, dividends and assets allocable to that class of the
particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust shares (as defined in "Investment Restrictions").
Shares have no pre-emptive or conversion rights (except as described in
"Purchases -- Conversion of Class B Shares" in the Prospectus). Shares are fully
paid and non-assessable. The Fund may be terminated (i) upon the merger or
consolidation of the Fund with another organization or upon the sale of all or
substantially all its assets if approved by the vote of the holders of
two-thirds of its outstanding shares, except that if the Trustees recommend such
merger, consolidation or sale, the approval by vote of the holders of a majority
of the Fund's outstanding shares will be sufficient or (ii) upon liquidation and
distribution of its assets, if approved by the vote of the holders of two-thirds
of its outstanding shares. If not so terminated, the Fund will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE -- The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or days on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once each day as
of the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets attributable
to the class and dividing the difference by the number of shares of the class
outstanding. Debt securities (other than short-term obligations), including
listed issues, are valued on the basis of valuations furnished by a pricing
service which utilizes both dealer-supplied valuations and electronic data
processing techniques which take into account appropriate factors such as
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. Use of the pricing service has been approved by the Fund's Board of
Trustees. Positions in listed options, Futures Contracts and Options on Futures
Contracts will normally be valued at the settlement price on the exchange on
which they are traded. Short-term obligations with a remaining maturity in
excess of 60 days will be valued based upon dealer-supplied valuations. Other
short-term obligations are valued at amortized cost, which constitutes fair
value as determined by the Board of Trustees. If acquired, preferred stocks,
common stocks and warrants will be valued at the last sale price on an exchange
or at the last quoted bid price for unlisted securities. Portfolio securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees. A
share's net asset value is effective for orders received by the dealer prior to
its calculation and received by MFD prior to the close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
offering price) to reach the value of that investment at the end of the periods.
The Fund may also calculate (i) a total rate of return, which is not reduced by
the CDSC (4% maximum for Class B shares and for shares purchased after April 1,
1996, a 1% maximum for Class C shares) and therefore may result in a higher rate
of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the maximum sales charge (currently
4.75%), and/or (iii) total rates of return which represent aggregate performance
over a period or year-by-year performance, and which may or may not reflect the
effect of the maximum or other sales charge or CDSC. The Fund's average annual
total rate of return for Class A shares reflecting the initial investment at the
current maximum public offering price for the one-year, five-year and ten-year
periods ended January 31, 1996 was 12.40%, 17.42% and 8.92%, respectively. The
Fund's average annual total rate of return for Class A shares not giving effect
to the sales charge on the initial investment for the one-year, five-year and
ten-year periods ended January 31, 1996 was 17.97%, 18.60% and 9.45%,
respectively. The Fund's average annual total rate of return for Class B shares
reflecting the CDSC for the one-year period ended January 31, 1996 and the
period from commencement of investment operations on September 27, 1993 through
January 31, 1996 was 12.98% and 6.65%, respectively. The Fund's average annual
total rate of return for Class B shares, not giving effect to the CDSC, for the
one-year period ended January 31, 1996 and the period from commencement of
investment operations on September 27, 1993 through January 31, 1996 was 16.98%
and 7.80%, respectively. The Fund's average annual total rate of return for
Class C shares for the one-year period ended January 31, 1996 and the period
from commencement of investment operations on January 3, 1994 through January
31, 1996 was 17.03% and 6.62%, respectively.
PERFORMANCE RESULTS: The performance results below, based on an assumed initial
investment of $10,000 in Class A shares, cover the period from January 1, 1986
to December 31, 1995. It has been assumed that dividends and capital gain
distributions were reinvested in additional shares. These performance results,
as well as any yield or total rate of return quotation provided by the Fund,
should not be considered as representative of the performance of the Fund in the
future since the net asset value and public offering price of shares of the Fund
will vary based not only on the type, quality and maturities of the securities
held in the portfolio of the Fund, but also on changes in the current value of
such securities and on changes in the Fund's expenses. These factors and
possible differences in the methods used to calculate yields and total rates of
return should be considered when comparing the yield and total rate of return to
yields and total rates of return published for other investment companies or
other investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value as well as account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
MFS HIGH INCOME FUND-A
VALUE OF
VALUE OF REINVESTED VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31 INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
----------- --------------- ------------- ---------- -----
1986 9,129 131 1,305 10,565
1987 7,941 114 2,540 10,595
1988 7,823 198 3,884 11,905
1989 6,715 170 4,784 11,669
1990 4,749 120 4,848 9,717
1991 6,187 156 8,125 14,468
1992 6,503 164 10,267 16,934
1993 7,124 180 12,914 20,218
1994 6,358 161 13,168 19,687
1995 6,833 173 16,057 23,063
EXPLANATORY NOTES: The results assume that the initial investment in the Fund on
January 1, 1986 has been reduced by the current applicable sales charge. No
adjustment has been made for any income taxes payable by shareholders.
YIELD: Any yield quotation of a class of shares of the Fund is based on the
annualized net investment income per share allocated to that class over a 30-
day period. The yield for each class of the Fund is calculated by dividing the
net investment income allocated to that class earned during the period by the
maximum offering price per share of that class of the Fund on the last day of
that period. The resulting figure is then annualized. Net investment income per
share of a class is determined by dividing (i) the dividends and interest
allocated to that class during the period, minus accrued expenses of that class
for the period by (ii) the average number of shares of the class entitled to
receive dividends during the period multiplied by the maximum offering price per
share on the last day of the period. The Fund's yield calculations for Class A
shares assume a maximum sales charge of 4.75%. The yield for Class A shares of
the Fund for the 30-day period ended January 31, 1996, was 8.08%. The yield for
Class B shares of the Fund for the 30-day period ended January 31, 1996 was
7.66% (which includes the effect of the CDSC). The yield for Class C shares of
the Fund for the 30-day period ended January 31, 1996 was 7.71%.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B shares and Class C shares assumes no CDSC is paid. The current
distribution rates for Class A, Class B and Class C shares of the Fund for the
twelve-month period ended on January 31, 1996 was 8.42%, 7.58% and 7.64%,
respectively.
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time, the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund
to make full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund
to register under the Securities Act of 1933 ("Truth in
Securities Act" or "Full Disclosure
Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund
to allow shareholders to take capital gain distributions either
in additional shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal
bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as
America's first globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end
mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York
Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard
Trust, the first Trust to invest in companies deemed to be
union-friendly by an Advisory Board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
9. DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares (the "Distribution Plans") pursuant to Section 12(b) of the 1940
Act and Rule 12b-1 thereunder (the "Rule") after having concluded that there is
a reasonable likelihood that each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the Fund's expense ratio to the extent the Fund's fixed costs are
spread over a larger net asset base. Also, an increase in net assets may lessen
the adverse effects that could result were the Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance that
the net assets of the Fund will increase or that the other benefits referred to
above will be realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time); or
(ii) to any insurance company which has entered into an agreement with the Fund
and MFD that permits such insurance company to purchase Class A shares from the
Fund at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from time
to time be required to meet certain other criteria in order to receive service
fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum amount
requirement from time to time. Dealers may from time to time be required to meet
certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
any Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended January 31, 1996, the Fund paid the following Distribution
Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- ------------------ ------- ------------- -------------
Class A Distribution Plan $1,239,712 $ 305,802 $933,910
Class B Distribution Plan $2,909,842 $2,249,106 $660,736
Class C Distribution Plan $ 96,471 $ 1,136 $ 95,335
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1996, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties of such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, assistance and consultation with respect to the preparation of filings
with the SEC.
The Portfolio of Investments at January 31, 1996, the Statement of Assets and
Liabilities at January 31, 1996, the Statement of Operations for the year ended
January 31, 1996, the Statement of Changes in Net Assets for each of the two
years in the period ended January 31, 1996, the Notes to Financial Statements
and the Independent Auditors' Report, each of which is included in the Annual
Report to shareholders of the Fund, are incorporated by reference into this SAI
and have been so incorporated in reliance upon the report of Deloitte & Touche
LLP, independent auditors, as experts in accounting and auditing. A copy of the
Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $4,455 $ 882 8 $263,815
A. Keith Brodkin -0- -0- N/A -0-
Peter G. Harwood 5,060 491 5 111,366
J. Atwood Ives 4,590 909 27 101,356
Lawrence T. Perera 4,725 2,283 26 102,546
William Poorvu 5,060 2,383 25 111,366
Charles W. Schmidt 4,860 2,272 20 105,411
Arnold D. Scott -0- -0- N/A -0-
Jeffrey L. Shames -0- -0- N/A -0-
David B. Stone 5,260 1,433 11 115,521
Elaine R. Smith 4,860 918 17 105,411
</TABLE>
(1) For fiscal year ended January 31, 1996.
(2) Based on normal retirement age of 73.
(3) Information provided is provided for calendar year 1995. All Trustees
receiving compensation served as Trustees of 23 funds within the MFS fund
complex (having aggregate net assets at December 31, 1995, of approximately
$17.6 billion) except Mr. Bailey, who served as Trustee of 73 funds within
the MFS fund complex (having aggregate net assets at December 31, 1995, of
approximately $31.7 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
---------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- -------------------------------------------------------------------------------
$4,009 $601 $1,002 $1,403 $2,005
4,365 655 1,091 1,528 2,182
4,720 708 1,180 1,652 2,360
5,075 761 1,269 1,776 2,538
5,431 815 1,358 1,901 2,715
5,786 868 1,446 2,025 2,893
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
HIGH INCOME
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
MHI-13-6/96/500 18/218/318
MFS(R)
THE FIRST NAME IN MUTUAL FUNDS
<PAGE>
<PAGE>
[MFS Logo] ANNUAL REPORT FOR
The first name in Mutual Funds YEAR ENDED
JANUARY 31, 1996
MFS [Registration Mark] HIGH INCOME FUND
[Cover Photo: A picture of steel drums]
<PAGE>
MFS [Registration Mark] HIGH INCOME FUND
TRUSTEES
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director, Massachusetts Financial Services
Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment adviser)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Robert J. Manning*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
CUSTODIAN
State Street Bank and Trust Company
AUDITORS
Deloitte & Touche LLP
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m. to
5 p.m. Eastern time (or leave a message anytime).
INVESTOR SERVICE
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For current account service, call toll free: 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576 any
business day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be equipped with a Telecommunications
Device for the Deaf.)
For share prices, account balances and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
TOP-RATED SERVICE
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The firm
achieved a 3.49 overall score - on a scale of 1 to 4 - in the 1995 survey. A
total of 71 firms responded, offering input on the quality of service they
receive from 36 mutual fund companies nationwide. The survey contained questions
about service quality in 17 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
For the 12 months ended January 31, 1996, Class A shares of the Fund provided a
total return of +17.97%, while Class B and Class C shares provided total returns
of +16.98% and +17.03%, respectively. All of these returns assume the
reinvestment of distributions but exclude the effects of any sales charges. The
Fund underperformed the Lehman Brothers Corporate Bond Index (the Lehman Index),
which returned +20.48% during the same period. Because the Fund's portfolio
generally consists of lower-rated issues, its results will not necessarily
mirror those of the Lehman Index, which is an unmanaged, market-value-weighted
index comprised of all public, fixed-rate non-convertible, investment-grade
corporate debt. A discussion of the Fund's performance for the past 12 months as
well as our outlook for the months ahead may be found in the Portfolio
Performance and Strategy section of this letter.
Economic Environment
We believe the U.S. economy will continue to grow in 1996 - although "subdued"
may be the best way to describe this growth. One factor holding growth in check
is the continued sluggishness of the consumer sector, an area that represents
approximately two-thirds of the economy. Going into this year, consumers have
been left in a somewhat weakened position, due in part to an increase in
consumer installment debt of some 30% over the past two years. A second reason
for the economy's weakness is the "lag effect" of increases in short-term
interest rates by the Federal Reserve Board in 1994 and into 1995. This lag
effect can last up to two years, although a series of reductions in short-term
rates by the Fed, which began late last year, could provide some support to the
economy through 1996. A third reason for weakness is the ongoing economic
doldrums in Europe and Japan, important markets for U.S. exports. Here again, we
are seeing a few signs, particularly in Japan, of modest recoveries that could
lead to improved prospects for U.S. exporters. Also, we believe lower interest
rates will give a boost to the U.S. housing market, an important segment of the
economy since it also affects such industries as major appliances, furniture,
and building-supply companies. Finally, although the first few weeks of 1996 saw
some signs of inflationary pressures, caused primarily by rising energy prices
and followed by an upward movement in gold, we believe inflation will remain
under control this year, due mainly to the subdued level of economic growth.
Interest Rates
Persistent signs of economic weakness led to decreases in short-term interest
rates by the Federal Reserve in late 1995 and early 1996 and, we believe, will
lead to some additional reductions as the year progresses. In the beginning of
the year, bond markets were trading in a narrow range as investors shifted
between concern about the lack of a budget resolution in Washington and hopes
that
<PAGE>
LETTER TO SHAREHOLDERS - continued
sluggish economic reports and low inflation might lead to lower interest rates.
Barring an unexpected shock, we believe that the still-cheap dollar, low
interest rates, and strong total employment will likely cushion the economy from
a sharp decline. Still, we believe that the subdued state of the economy makes
it unlikely that long-term interest rates will test the high end of 5.75% to
6.75%. However, in an environment of 2% to 3% inflation, this still leaves real
(adjusted for inflation) rates of return in the fixed-income markets at
relatively attractive levels.
Portfolio Performance and Strategy
During the past year, spreads in the high-yield market widened from
approximately 350 basis points (3.5%) to 425 basis points (4.25%) over
Treasuries, primarily due to a decline in interest rates triggered by slightly
weaker economic activity (although principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity). Also,
during the second half of 1995 the default rate rose modestly as credit problems
began to surface, particularly in the retail and gaming sectors of the market.
The default rate still remains below its historic average, but the trend toward
higher defaults has also caused spreads to widen. Cash flows into high-yield
mutual funds, which represent almost half of the market, remained positive all
year and helped absorb the new-issue market. New issuance totaled $45 billion
for the year and registered the second highest level of activity in the history
of the high-yield market.
Our strategy calls for continued selectivity in the new-issue market
because we believe that overall credit quality has declined. Consequently, we
are finding the secondary market more attractive for opportunities to earn
higher risk-adjusted returns. For the remainder of 1996, we believe the economy
will continue to grow at a slower pace than it did in 1995, so we have
positioned our portfolio more defensively by raising our positions in
non-cyclical companies such as paging and cable television, and by swapping into
more senior bonds in the capital structures of the companies in which we invest.
Lastly, we also have a bias toward the stronger, market-leading companies
in the high-yield universe. We believe these companies can generate significant
free cash flows in the current economic environment, enabling them to deleverage
their balance sheets, which can lead to an improvement in credit quality. As
always, our discipline is focused on fundamental credit research, the driving
influence in determining our overall investment strategy.
2
<PAGE>
LETTER TO SHAREHOLDERS - continued
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[A Photo of A. Keith Brodkin] [A Photo of Robert J. Manning]
[Signature of A. Keith Brodkin] [Signature of Robert J. Manning]
A. Keith Brodkin Robert J. Manning
Chairman Portfolio Manager
February 14, 1996
PORTFOLIO MANAGER PROFILE
Robert Manning began his career at MFS in 1984 as a research analyst in the High
Yield Bond Department. A graduate of the University of Lowell and Boston
College's Graduate School of Management, he was named Vice President -
Investments in 1988, Senior Vice President in 1993 and Portfolio Manager of MFS
High Income Fund in 1994.
OBJECTIVE AND POLICIES
The objective of the Fund is to provide high current income through investment
primarily in a professionally managed, diversified portfolio of fixed-income
securities, some of which may involve equity features. Capital growth, if any,
is a consideration incidental to the objective of high current income.
3
<PAGE>
OBJECTIVE AND POLICIES - continued
The Fund seeks to achieve its objective by investing primarily in fixed-income
securities which are in the lower rating categories. The Fund may also invest in
foreign fixed-income securities, purchase fixed-income securities on a
"when-issued" basis and enter into options, futures transactions and forward
foreign currency exchange contracts. The Fund will seek to reduce risk through
full-time management of a broadly diversified portfolio, credit analysis and
attention to current developments and trends in both the economy and financial
markets.
Performance
The information below and on the following page illustrates the historical
performance of MFS High Income Fund Class A shares in comparison to various
market indicators. Fund results in the graph reflect the deduction of the 4.75%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect any
fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
Class B shares were offered effective September 27, 1993. Information on Class B
share performance appears on the next page.
Please note that effective January 3, 1994, Class C shares were offered.
Information on Class C share performance appears on the next page.
Please note that the performance of other classes will be greater than or less
than the line shown, based on the differences in loads and fees paid by share-
holders investing in the different classes.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended January 31, 1996)
[PLOT POINTS FOR GRAPH]
MFS High Lehman Brothers
Days Income Fund-A Corporate Bond Index CPI
- --------------------------------------------------------------------------------
2/1/91 0 9,525 10,000 10,000
- --------------------------------------------------------------------------------
1/31/92 365 14,330 11,557 10,260
- --------------------------------------------------------------------------------
1/31/93 730 16,674 13,016 10,594
- --------------------------------------------------------------------------------
1/31/94 1095 19,697 14,543 10,862
- --------------------------------------------------------------------------------
1/31/95 1460 18,919 13,996 11,166
- --------------------------------------------------------------------------------
1/31/96 1825 22,319 16,862 11,471
- --------------------------------------------------------------------------------
4
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended January 31, 1996)
[PLOT POINTS]
MFS High Lehman Brothers
Days Income Fund-A Corporate Bond Index CPI
- --------------------------------------------------------------------------------
2/1/86 0 9,525 10,000 10,000
- --------------------------------------------------------------------------------
1/31/87 365 10,966 11,820 10,143
- --------------------------------------------------------------------------------
1/31/88 730 10,857 12,328 10,554
- --------------------------------------------------------------------------------
1/31/89 1095 12,123 13,149 11,047
- --------------------------------------------------------------------------------
1/31/90 1460 11,116 14,598 11,621
- --------------------------------------------------------------------------------
1/31/91 1825 10,011 16,025 12,278
- --------------------------------------------------------------------------------
1/31/92 2189 15,081 18,520 12,597
- --------------------------------------------------------------------------------
1/31/93 2556 17,458 20,859 13,008
- --------------------------------------------------------------------------------
1/31/94 2921 20,730 23,306 13,336
- --------------------------------------------------------------------------------
1/31/95 3286 19,911 22,429 13,710
- --------------------------------------------------------------------------------
1/31/96 3651 23,490 27,022 14,084
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
=====================================================================================================
<S> <C> <C> <C> <C>
MFS High Income Fund (Class A) including
4.75% sales charge +12.40% + 8.47% +17.42% + 8.92%
- -----------------------------------------------------------------------------------------------------
MFS High Income Fund (Class A) at net asset value +17.97% +10.21% +18.60% + 9.45%
- -----------------------------------------------------------------------------------------------------
MFS High Income Fund (Class B) with CDSC+ +12.98% -- -- + 6.65%*
- -----------------------------------------------------------------------------------------------------
MFS High Income Fund (Class B) without CDSC +16.98% -- -- + 7.80%*
- -----------------------------------------------------------------------------------------------------
MFS High Income Fund (Class C) +17.03% -- -- + 6.62%**
- -----------------------------------------------------------------------------------------------------
Average high current yield fund# +18.03% + 9.86% +16.61% + 9.56%
- -----------------------------------------------------------------------------------------------------
Lehman Brothers Corporate Bond Index# +20.48% + 9.01% +11.02% +10.45%
- -----------------------------------------------------------------------------------------------------
Consumer Price Index[ss]# + 2.73% + 2.69% + 2.78% + 3.48%
- -----------------------------------------------------------------------------------------------------
<FN>
+ These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 27, 1993.
* For the period from the commencement of offering of Class B shares,
September 27, 1993 to January 31, 1996.
** For the period from the commencement of offering of Class C shares, January
3, 1994 to January 31, 1996. Class C shares have no initial sales charge or
CDSC but, along with Class B shares, have higher annual fees and expenses
than Class A shares.
# Source: Lipper Analytical Services, Inc.
[ss] The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
In the above table, we have included the average annual total returns of all
high current yield funds (including the Fund) tracked by Lipper Analytical
Services, Inc. (an independent firm which rates mutual fund performance) for the
applicable time periods. Because these returns do not reflect any applicable
sales charges, we have also included the Fund's results at net asset value (no
sales charge) for comparison.
All results are historical and are not an indication of future results. The
investment return and principal value of an investment in a mutual fund will
vary with changes in market conditions, and shares, when redeemed, may be worth
more or less than their original cost.
5
<PAGE>
PORTFOLIO OF INVESTMENTS - January 31, 1996
<TABLE>
<CAPTION>
Non-Convertible Bonds - 89.6%
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Aerospace - 0.5%
CHC Helicopter, 11.5s, 2002 $ 4,000 $ 3,570,000
Haynes International, Inc., 11.25s, 1998 1,000 1,000,000
------------
$ 4,570,000
- -------------------------------------------------------------------------------------------
Automotive - 2.2%
Exide Corp., 10s, 2005 $ 3,900 $ 4,192,500
Harvard Industries, Inc., 12s, 2004 8,250 8,827,500
Harvard Industries, Inc., 11.125s, 2005 2,550 2,639,250
SPX Corp., 11.75s, 2002 4,050 4,343,625
------------
$ 20,002,875
- -------------------------------------------------------------------------------------------
Building - 5.5%
American Standard, Inc., 0s, 2005 $ 19,625 $ 17,098,281
Congoleum Corp., 9s, 2001 1,950 1,891,500
Lone Star Industries, Inc., 10s, 2003 4,542 4,598,775
Nortek, Inc., 9.875s, 2004 8,750 8,334,375
Schuller International Group, Inc., 10.875s, 2004 5,250 5,906,250
UDC Homes, Inc., 0s, 2000* 30 15,136
USG Corp., 9.25s, 2001 11,750 12,660,625
------------
$ 50,504,942
- -------------------------------------------------------------------------------------------
Chemicals - 4.4%
Arcadian Partners L.P., 10.75s, 2005 $ 5,350 $ 5,938,500
INDSPEC Chemical Corp., 0s, 2003 5,450 4,632,500
Koppers Industries, Inc., 8.5s, 2004 1,500 1,470,000
NL Industries, Inc., 11.75s, 2003 10,600 11,342,000
Rexene Corp., 11.75s, 2004 5,150 5,407,500
UCC Investors Holdings, Inc., 10.5s, 2002 3,250 3,396,250
UCC Investors Holdings, Inc., 0s, 2005 10,250 8,148,750
------------
$ 40,335,500
- -------------------------------------------------------------------------------------------
Conglomerates - 0.4%
Bell & Howell Co., 10.75s, 2002 $ 3,800 $ 3,990,000
- -------------------------------------------------------------------------------------------
Consumer Goods and Services - 6.1%
Consolidated Cigar Corp., 10.5s, 2003 $ 4,750 $ 4,963,750
Fieldcrest Cannon, Inc., 11.25s, 2004 3,800 3,648,000
International Semi-Tech Microelectronics,
Inc., 0s, 2003 8,000 4,680,000
Ithaca Industries, Inc., 11.125s, 2002** 3,800 1,710,000
Reeves Industries, Inc., 11s, 2002 3,250 2,937,188
Remington Arms, Inc., 9.5s, 2003## 2,000 1,640,000
Revlon, Inc., 10.5s, 2003 13,350 13,817,250
Samsonite Corp., 11.125s, 2005 5,500 5,417,500
Sealy Corp., 9.5s, 2003 3,400 3,451,000
Westpoint Stevens, Inc., 9.375s, 2005 14,100 14,135,250
------------
$ 56,399,938
- -------------------------------------------------------------------------------------------
Containers - 9.0%
Atlantis Group, Inc., 11s, 2003 $ 7,500 $ 6,675,000
Calmar, Inc., 11.5s, 2005 8,000 8,100,000
Container Corp. of America, 10.75s, 2002 5,000 5,137,500
Gaylord Container Co., 0s, 2005 12,000 11,880,000
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Non-Convertible Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Containers - continued
Ivex Packaging Corp., 12.5s, 2002 $ 5,350 $ 5,684,375
Owens-Illinois, Inc., 11s, 2003 10,600 12,004,500
Owens-Illinois, Inc., 9.75s, 2004 3,250 3,461,250
Owens-Illinois, Inc., 9.95s, 2004 500 532,500
Plastic Containers, Inc., 10.75s, 2001 6,750 6,918,750
RXI Holdings, Inc., 14s, 2002 3,500 3,080,000
SD Warren Co., 12s, 2004 4,700 5,076,000
Silgan Corp., 11.75s, 2002 6,710 7,213,250
Stone Consolidated Corp., 10.25s, 2000 3,850 4,138,750
Stone Container Corp., 9.875s, 2001 2,950 2,854,125
------------
$ 82,756,000
- -------------------------------------------------------------------------------------------
Defense Electronics - 0.5%
Alliant Techsystems, Inc., 11.75s, 2003 $ 4,350 $ 4,785,000
- -------------------------------------------------------------------------------------------
Entertainment - 4.2%
ACT III Theatres, Inc., 11.875s, 2003 $ 3,300 $ 3,580,500
Ballys Grand, Inc., 10.375s, 2003 9,650 10,060,125
Grand Casinos, Inc., 10.125s, 2003 5,725 6,197,313
Griffin Gaming & Entertainment, 0, 2000 4,400 4,136,000
Maritime Group Ltd., 13.5s, 1997** 3,319 597,407
SCI Television, Inc., 11s, 2005 11,250 11,953,125
Sam Houston Race Park, Inc., 11s, 2001**# 1,613 645,000
United Artist Theater Circuit, Inc., 11.5s, 2002 1,500 1,620,000
------------
$ 38,789,470
- -------------------------------------------------------------------------------------------
Financial Institutions - 3.5%
American Annuity Group, Inc., 11.125s, 2003 $ 5,600 $ 6,104,000
American Life Holdings Co., 11.25s, 2004 3,250 3,445,000
Americo Life, Inc., 9.25s, 2005 3,800 3,705,000
GPA Delaware, Inc., 8.75s, 1998 9,480 9,029,700
Tiphook Finance Corp., 7.125s, 1998 5,200 3,848,000
Tiphook Finance Corp., 8s, 2000 8,353 6,243,867
------------
$ 32,375,567
- -------------------------------------------------------------------------------------------
Food and Beverage Products - 1.7%
PMI Acquisition Corp., 10.25s, 2003 $ 2,495 $ 2,594,800
Specialty Foods Corp., 10.25s, 2001 8,000 7,480,000
Texas Bottling Group, Inc., 9s, 2003 5,750 5,836,250
------------
$ 15,911,050
- -------------------------------------------------------------------------------------------
Forest and Paper Products - 1.3%
Fort Howard Corp., 9.25s, 2001 $ 650 $ 672,750
Pacific Lumber Co., 10.5s, 2003 9,500 9,072,500
Repap New Brunswick, Inc., 10.625s, 2005 2,500 2,425,000
------------
$ 12,170,250
- -------------------------------------------------------------------------------------------
Machinery - 0.8%
Fairfield Manufacturing, 11.375s, 2001 $ 2,850 $ 2,842,875
Thermadyne Industries, 10.75s, 2003 1,720 1,685,600
Thermadyne Industries Holdings Corp., 10.25s, 2002 3,300 3,300,000
------------
$ 7,828,475
- -------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Non-Convertible Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Medical and Health Products - 1.2%
Tenet Healthcare Corp., 10.125s, 2005 $ 9,500 $ 10,640,000
- -------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 2.5%
Community Health System, 10.25s, 2003 $ 3,500 $ 3,815,000
Integrated Health Services, Inc., 10.75s, 2004 6,750 7,458,750
OrNda Healthcorp, 12.25s, 2002 7,800 8,599,500
Quorum Health Group, Inc., 8.75s, 2005 2,750 2,921,875
------------
$ 22,795,125
- -------------------------------------------------------------------------------------------
Metals and Minerals - 1.3%
Easco Corp., 10s, 2001 $ 1,000 $ 1,020,000
Jorgensen (Earle M.) Co., 10.75s, 2000 7,200 6,876,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 3,550 3,700,875
------------
$ 11,596,875
- -------------------------------------------------------------------------------------------
Mortgage-Backed Pass-Throughs - 0.4%
Merrill Lynch Mortgage Investors, Inc.,
1994-M1, 8.22s, 2021 $ 4,500 $ 3,535,312
- -------------------------------------------------------------------------------------------
Oil Services - 2.1%
Amerigas Partners L.P., 10.125s, 2007 $ 3,400 $ 3,638,000
Ferrell Gas L.P., 10s, 2001 4,700 5,052,500
Global Marine, Inc., 12.75s, 1999 4,400 4,884,000
Kelley Oil & Gas Corp., 13.5s, 1999 2,400 2,388,000
Tuboscope Vetco International, Inc., 10.75s, 2003 3,200 3,416,000
------------
$ 19,378,500
- -------------------------------------------------------------------------------------------
Oils - 1.2%
Gulf Canada, 9.25s, 2004 $ 6,000 $ 6,270,000
Mesa Capital Corp., 12.75s, 1998 4,950 4,430,250
------------
$ 10,700,250
- -------------------------------------------------------------------------------------------
Printing and Publishing - 0.5%
Day International Group, Inc., 11.125s, 2005 $ 2,100 $ 2,178,750
Western Publishing Group, 7.65s, 2002 3,000 2,220,000
------------
$ 4,398,750
- -------------------------------------------------------------------------------------------
Restaurants and Lodging - 4.2%
Boomtown, Inc., 11.5s, 2003 $ 6,070 $ 5,220,200
Boyd Gaming Corp., 10.75s, 2003 7,900 8,393,750
Coast Hotels and Casino, 13s, 2002## 3,625 3,547,969
Four Seasons Hotels, Inc., 9.125s, 2000## 7,750 7,750,000
Harrah's Operating, Inc., 10.875s, 2002 7,355 7,980,175
Station Casinos, Inc., 9.625s, 2003 5,850 5,893,875
------------
$ 38,785,969
- -------------------------------------------------------------------------------------------
Special Products and Services - 8.6%
Alabama Outdoor Advertising, Inc., 10s, 1996** $ 422 $ 316,749
Buckeye Cellulose Corp., 8.5s, 2005 2,000 2,090,000
Gillett Holdings, Inc., 12.25s, 2002 4,009 4,209,325
Howmet Corp., 10s, 2003## 2,850 3,021,000
IMO Industries, Inc., 12s, 2001 10,050 10,301,250
Idex Corp., 9.75s, 2002 1,260 1,345,050
Interlake Corp., 12s, 2001 5,200 5,330,000
Interlake Corp., 12.125s, 2002 9,200 8,740,000
</TABLE>
8
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Non-Convertible Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Special Products and Services - continued
Interlake Revolver, "B'', 5.75s, 1997## $ 1,663 $ 1,654,193
K & F Industries, Inc., 11.875s, 2003 6,475 7,009,188
Maxxam, Inc., 12.5s, 1999 1,762 1,788,227
Newflo Corp., 13.25s, 2002 3,850 4,023,250
Polymer Group, Inc., 12.25s, 2002 8,250 8,538,750
Spreckels Industries, Inc., 11.5s, 2000 3,900 3,958,500
Synthetic Industries, Inc., 12.75s, 2002 11,755 12,048,875
Talley Manufacturing & Technology, Inc., 10.75s, 2003 4,500 4,545,000
Wolverine Tube, Inc., 10.125s, 2002 400 424,000
------------
$ 79,343,357
- -------------------------------------------------------------------------------------------
Steel - 2.3%
AK Steel Holdings Corp., 10.75s, 2004 $ 6,500 $ 7,239,375
Armco, Inc., 11.375s, 1999 2,875 3,004,375
UCAR Global Enterprises, Inc., 12s, 2005 4,935 5,773,950
WCI Steel, Inc., 10.5s, 2002 4,825 4,794,844
------------
$ 20,812,544
- -------------------------------------------------------------------------------------------
Stores - 2.0%
Finlay Enterprises, Inc., 0s, 2005 $ 10,150 $ 6,775,125
Finlay Fine Jewelry, 10.625s, 2003 1,000 965,000
Parisian, Inc., 9.875s, 2003 5,190 4,424,475
Woodward & Lothrop, Inc., 14.75s, 1995** 13,100 6,419,000
------------
$ 18,583,600
- -------------------------------------------------------------------------------------------
Supermarkets - 3.1%
Brunos, Inc., 10.5s, 2005 $ 3,250 $ 3,201,250
Dominick's Finer Foods, Inc., 10.875s, 2005 5,950 6,426,000
Grand Union Co., 12s, 2004 6,225 5,197,875
Pathmark Stores, Inc., 9.625s, 2003 700 682,500
Purity Supreme, Inc., 11.75s, 1999 2,000 2,180,000
Ralphs Grocery Co., 10.45s, 2004 10,450 10,397,750
------------
$ 28,085,375
- -------------------------------------------------------------------------------------------
Telecommunications - 17.9%
Albritton Communications Corp., 11.5s, 2004 $ 6,350 $ 6,746,875
American Communications Services, 13s, 2005*## 3,100 1,751,500
Bell Cablemedia PLC, 0s, 2005 6,250 4,125,000
Cablevision Industries Corp., 10.75s, 2002 7,850 8,576,125
Cablevision Systems Corp., 10.75s, 2004 4,705 4,999,063
Cablevision Systems Corp., 9.25s, 2005 7,350 7,699,125
Century Communications Corp., 9.5s, 2005 2,600 2,704,000
Comcast Corp., 9.375s, 2005 6,500 6,825,000
Continental Cablevision, Inc., 8.875s, 2005 1,000 1,052,500
Continental Cablevision, Inc., 8.3s, 2006## 9,150 9,207,187
Diamond Cable Communications PLC, 0s, 2005 4,250 2,592,500
Echostar Communications Corp., 0s, 2004 4,000 2,980,000
Falcon Holdings Group, Inc., 11s, 2003# 11,092 10,815,125
Granite Broadcasting Corp., 10.375s, 2005 1,500 1,560,000
Jones Intercable, Inc., 11.5s, 2004 5,450 6,049,500
Jones Intercable, Inc., 10.5s, 2008 5,650 6,271,500
</TABLE>
9
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Non-Convertible Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications - continued
K-III Communications Corp., 10.625s, 2002 $ 3,305 $ 3,528,087
MFS Communications, Inc., 0s, 2004 6,250 4,953,125
MFS Communications, Inc., 0s, 2006 22,000 14,410,000
Marcus Cable Operating Co., 0s, 2004 4,000 3,010,000
Metrocall, Inc., 10.375s, 2007 3,000 3,225,000
Mobile Telecommunication Technologies Corp., 13.5s, 2002 3,900 4,338,750
Mobilemedia Communications, Inc., 0s, 2003 8,900 7,120,000
Paging Network, Inc., 8.875s, 2006 12,975 13,429,125
ProNet, Inc., 11.875s, 2005 5,500 6,105,000
Rifkin Acquisition Partners L.P., 11.125s, 2006## 3,000 3,060,000
Rogers Cablesystems Ltd., 9.625s, 2002 750 804,375
Rogers Cablesystems Ltd., 10.125s, 2012 5,000 5,412,500
USA Mobile Communication, 9.5s, 2004 4,000 4,020,000
Le Group Videotron Ltd., 0s, 2005 11,550 7,507,500
------------
$164,878,462
- -------------------------------------------------------------------------------------------
Transportation - 0.6%
Continental Airlines Holdings, Inc., 12.125s, 1996**$ 10,000 $ 1,400,000
Continental Airlines, Liquidating Trust, 11.75s, 1999** 5,250 525
Moran Transportation Co., 11.75s, 2004 2,300 2,236,750
PDV America, Inc., 7.875s, 2003 1,850 1,796,572
------------
$ 5,433,847
- -------------------------------------------------------------------------------------------
Utilities - 1.6%
Kenetech Corp., 12.75s, 2002 $ 8,250 $ 3,506,250
Midland Funding Corp. II, "A", 11.75s, 2005 2,850 3,019,946
Westinghouse Electric Co., 8.375s, 2002 5,250 5,531,137
Westinghouse Electric Co., 6.875s, 2003 2,700 2,631,393
------------
$ 14,688,726
- -------------------------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $817,767,359) $824,075,759
- -------------------------------------------------------------------------------------------
Common Stocks and Warrants - 0.7%
===========================================================================================
Shares
- -------------------------------------------------------------------------------------------
Aerospace
CHC Helicopters, Warrants* 16,000 $ 8,000
- -------------------------------------------------------------------------------------------
Automotive - 0.3%
Borg-Warner Automotive, Inc. 101,621 $ 2,947,009
- -------------------------------------------------------------------------------------------
Building
Atlantic Gulf Communities Corp.* 690 $ 4,658
Atlantic Gulf Communities Corp., Warrants* 9,637 301
------------
$ 4,959
- -------------------------------------------------------------------------------------------
Consumer Goods and Services
Ranger Industries, Inc.* 266,768 $ 26,677
- -------------------------------------------------------------------------------------------
Containers
RXI Holdings, Inc., Warrants* 3,500 $ 25,375
- -------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Common Stocks and Warrants - continued
===========================================================================================
Issuer Shares Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Entertainment
Grand Palais Casinos, Warrants*## 111,660 $ 0
Hemmeter Entertainment, Warrants* 111,660 0
Palace Casinos, Warrants* 36,000 360
Sam Houston Race Park, Inc.* 481 2,405
------------
$ 2,765
- -------------------------------------------------------------------------------------------
Medical and Health Products
Republic Health Corp., Warrants* 2,500 $ 625
- -------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.1%
OrNda Healthcorp, Inc.* 51,999 $ 1,312,975
- -------------------------------------------------------------------------------------------
Oil Services - 0.1%
ICO, Inc., Warrants* 706,250 $ 459,062
- -------------------------------------------------------------------------------------------
Oils
Crystal Oil Co., $0.075, Warrants* 3,954,527 $ 0
Crystal Oil Co., $0.10, Warrants* 3,455,042 0
Crystal Oil Co., $0.125, Warrants* 4,107,411 0
Crystal Oil Co., $0.15, Warrants* 4,041,943 0
Crystal Oil Co., $0.25, Warrants* 4,041,943 0
------------
$ 0
- -------------------------------------------------------------------------------------------
Pollution Control
Envirosource, Inc.*+ 1,666 $ 6,039
- -------------------------------------------------------------------------------------------
Printing and Publishing
Triton Group Ltd.* 588,876 $ 294,438
- -------------------------------------------------------------------------------------------
Special Products and Services - 0.2%
Gillett Holdings, Inc.*+ 85,019 $ 1,785,399
- -------------------------------------------------------------------------------------------
Total Common Stocks and Warrants (Identified Cost, $12,978,170) $ 6,873,323
- -------------------------------------------------------------------------------------------
Preferred Stocks - 2.6%
===========================================================================================
Special Products and Services - 0.9%
K-III Communications Corp.# 83,400 $ 8,673,566
- -------------------------------------------------------------------------------------------
Supermarkets - 1.7%
Supermarkets General Holdings Corp., $3.52 Exch.* 569,098 $ 15,365,646
- -------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $16,773,399) $ 24,039,212
- -------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.2%
===========================================================================================
Entertainment
Granite Broadcasting, Cv. Pfd., 1.938
(Identified Cost, $1,988,688) 33,000 $ 1,608,750
- -------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Short-Term Obligations - 3.3%
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank, due 2/01/96 $ 8,495 $ 8,495,000
Federal National Mortgage Assn.,
due 2/05/96 - 2/13/96 21,485 21,458,209
Total Short-Term Obligations, at Amortized Cost $29,953,209
- -------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $879,460,825) $886,550,253
Other Assets, Less Liabilities - 3.6% 33,237,944
- -------------------------------------------------------------------------------------------
Net Assets - 100.0% $919,788,197
- -------------------------------------------------------------------------------------------
<FN>
* Non-income producing security.
** Non-income producing security in default.
# Payment-in-kind security.
## SEC Rule 144A restriction.
+ Restricted security.
++ Affiliated issuers are those in which the Fund's holdings of an issuer represent 5% or
more of the outstanding voting securities of the issuer.
</FN>
</TABLE>
See notes to financial statements
12
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
================================================================================
January 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $872,236,906) $ 886,523,576
Affiliated issuers (identified cost, $7,223,919) 26,677
-------------
Total investments, at value
(identified cost, $879,460,825) $ 886,550,253
Cash 35,255
Receivable for investments sold 29,700,543
Receivable for Fund shares sold 1,302,595
Interest receivable 18,872,685
Other assets 10,854
-------------
Total assets $ 936,472,185
-------------
Liabilities:
Distributions payable $ 2,577,203
Payable for investments purchased 12,965,067
Payable for Fund shares reacquired 584,103
Payable to affiliates -
Management fee 11,207
Shareholder servicing agent fee 1,068
Distribution fee 160,749
Accrued expenses and other liabilities 384,591
-------------
Total liabilities $ 16,683,988
-------------
Net assets $ 919,788,197
-------------
Net assets consist of:
Paid-in capital $1,187,087,740
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 7,089,428
Accumulated net realized loss on investments
and foreign currency transactions (271,652,470)
Distributions in excess of net investment income 2,736,501
-------------
Total $ 919,788,197
=============
Shares of beneficial interest outstanding 175,512,084
=============
Class A shares:
Net asset value and redemption price per share
(net assets of $620,273,897 / 118,365,548 shares
of beneficial interest outstanding) $5.24
=====
Offering price per share (100/95.25) $5.50
=====
Class B shares:
Net asset value, redemption price, and offering price
per share (net assets of $283,209,968 / 54,039,504
shares of beneficial interest outstanding) $5.24
=====
Class C shares:
Net asset value, redemption price, and offering price
per share (net assets of $16,304,332 4 3,107,032 shares
of beneficial interest outstanding) $5.25
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
13
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
================================================================================
Year Ended January 31, 1996
- --------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 86,970,012
Dividends 16,574
Foreign taxes withheld (35,947)
------------
Total investment income $ 86,950,639
------------
Expenses -
Management fee $ 4,031,708
Trustees' compensation 61,516
Shareholder servicing agent fee (Class A) 846,031
Shareholder servicing agent fee (Class B) 640,165
Shareholder servicing agent fee (Class C) 14,471
Distribution and service fee (Class A) 1,239,712
Distribution and service fee (Class B) 2,909,842
Distribution and service fee (Class C) 96,472
Custodian fee 343,967
Postage 158,913
Printing 136,635
Auditing fees 86,550
Legal fees 52,213
Miscellaneous 794,714
------------
Total expenses $ 11,412,909
Fees paid indirectly (208,205)
------------
Net expenses $ 11,204,704
------------
Net investment income $ 75,745,935
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions (including loss of $6,527,829 from
transactions with affiliated issuers) $(28,303,751)
Foreign currency transactions 3,322
------------
Net realized loss on investments $(28,300,429)
------------
Change in unrealized appreciation -
Investments $ 95,499,724
Translation of assets and liabilities in
foreign currencies (8,224)
------------
Net unrealized gain on investments $ 95,491,500
Net realized and unrealized gain on
investments and foreign currency $ 67,191,071
------------
Increase in net assets from operations $142,937,006
============
See notes to financial statements
14
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
================================================================================
Year Ended January 31, 1996 1995
- --------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 75,745,935 $ 69,190,438
Net realized loss on investments and
foreign currency transactions (28,300,429) (24,359,807)
Net unrealized gain (loss) on
investments and foreign currency 95,491,500 (82,756,770)
------------- --------------
Increase (decrease) in net assets
from operations $ 142,937,006 $ (37,926,139)
------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (50,453,186) $ (45,268,326)
From net investment income (Class B) (22,802,500) (22,704,630)
From net investment income (Class C) (756,472) (189,767)
In excess of net investment income (Class A) -- (929,038)
In excess of net investment income (Class B) -- (466,221)
In excess of net investment income (Class C) -- (3,895)
------------- --------------
Total distributions declared
to shareholders $ (74,012,158) $ (69,561,877)
------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 435,560,671 $ 394,133,456
Net asset value of shares issued to
shareholders in reinvestment
of distributions 42,125,341 36,319,705
Cost of shares reacquired (439,675,135) (526,384,411)
------------- --------------
Increase (decrease) in net assets
from Fund share transactions $ 38,010,877 $ (95,931,250)
------------- --------------
Total increase (decrease)
in net assets $ 106,935,725 $ (203,419,266)
Net assets:
At beginning of period 812,852,472 1,016,271,738
------------- --------------
At end of period (including distributions
in excess of net investment income of
$(2,736,501) and $(62,774), respectively $ 919,788,197 $ 812,852,472
============= ==============
See notes to financial statements
15
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
====================================================================================================================================
Year Ended January 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income[ss] $ 0.45 $ 0.44 $ 0.40 $ 0.51 $ 0.56
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.39 (0.66) 0.48 0.24 1.21
-------- -------- -------- -------- --------
Total from investment operations $ 0.84 $ (0.22) $ 0.88 $ 0.75 $ 1.77
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.44) $ (0.43) $ (0.42) $ (0.51) $ (0.56)
In excess of net investment income -- (0.01) (0.07) -- --
From paid-in capital -- -- -- (0.02) (0.03)
======== ======== ======== ======== ========
Total distributions declared to
shareholders $ (0.44) $ (0.44 $ (0.49) $ (0.53) $ (0.59)
======== ======== ======== ======== ========
Net asset value - end of period $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89
-------- -------- -------- -------- --------
Total return++ 17.97% (3.95)% 18.13% 16.36% 49.64%
Ratios (to average net assets)/Supplemental data[ss]:
Expenses## 1.00% 0.99% 1.00% 1.03% 1.10%
Net investment income (loss) 8.83% 8.65% 8.22% 10.21% 11.59%
Portfolio turnover 59% 59% 68% 75% 28%
Net assets at end of period (000,000 omitted) $ 620 $ 524 $ 645 $ 585 $ 556
<FN>
++ Total returns for Class A shares do not include the applicable sales charge (except for reinvestment of dividends prior to
March 1, 1991). If the charge had been included, the results would have been lower.
# Per share data for the period subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
[ss] The distributor waived a portion of its distribution fee for the years indicated. If this fee had been incurred by the Fund,
the net investment income per share and ratios would have been:
Net investment income -- $ 0.43 $ 0.40 -- --
Ratios (to average net assets):
Expenses -- 1.09% 1.04% -- --
Net investment income -- 8.55% 8.18% -- --
</FN>
</TABLE>
See notes to financial statements
16
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
==============================================================================================================
Year Ended January 31, 1991 1990 1989 1988 1987
- --------------------------------------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 4.85 $ 6.04 $ 6.17 $ 7.11 $ 7.14
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.65 $ 0.69 $ 0.76 $ 0.77 $ 0.93
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions (1.08) (1.13) (0.09) (0.83) 0.07
------ ------ ------ ------ ------
Total from investment operations $(0.43) $(0.44) $ 0.67 $(0.06) $ 1.00
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.71) $(0.75) $(0.75) $(0.87) $(0.93)
From net realized gain on investments
and foreign currency transactions -- -- (0.05) (0.01) (0.10)
From paid-in capital -- -- --** --* --
====== ====== ====== ====== ======
Total distributions declared to
shareholders $(0.71) $(0.75) $(0.80) $(0.88) $(1.03)
------ ------ ------ ------ ------
Net asset value - end of period $ 3.71 $ 4.85 $ 6.04 $ 6.17 $ 7.11
------ ------ ------ ------ ------
Total return++ (10.99)% (9.18)% 10.68% (1.94)% 14.03%
Ratios (to average net assets)/Supplemental data:
Expenses ## 1.05% 0.87% 0.87% 0.75% 0.71%
Net investment income 14.97% 12.17% 12.44% 11.49% 12.49%
Portfolio turnover 24% 25% 34% 28% 46%
Net assets at end of period (000,000 omitted) $ 380 $ 574 $ 880 $1,001 $1,232
<FN>
++ Total returns for Class A shares do not include the applicable sales charge (except for reinvestment of dividends prior to
March 1, 1991). If the charge had been included, the results would have been lower.
# Per share data for the period subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
* Includes a per share distribution from paid-in capital of $0.0006.
** Includes a per share distribution from paid-in capital of $0.0004.
</FN>
</TABLE>
See notes to financial statements
17
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
====================================================================================================================================
Year Ended January 31, 1996 1995 1994* 1996 1995 1994**
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Class C
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 4.84 $ 5.50 $ 5.27 $ 4.85 $ 5.50 $ 5.41
------- ------- ------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.41 $ 0.39 $ 0.15 $ 0.41 $ 0.41 $ --
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.39 (0.65) 0.22 0.39 (0.66) 0.09
------- ------- ------- ------- ------- -------
Total from investment operations $ 0.80 $ (0.26) $ 0.37 $ 0.80 $ (0.25) $ 0.09
------- ------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.40) $ (0.39 $ (0.13) $ (0.40) $ (0.39) $ -- ++
In excess of net investment income -- (0.01) (0.01) -- (0.01) -- ++
------- ------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (0.40) $ (0.40) $ (0.14) $ (0.40) $ (0.40) $ --
------- ------- ------- ------- ------- -------
Net asset value - end of period $ 5.24 $ 4.84 $ 5.50 $ 5.25 $ 4.85 $ 5.50
------- ------- ------- ------- ------- -------
Total return 16.98% (4.77)% 20.29%+ 17.03% (4.51)% 20.94%+
Ratios (to average net assets)/Supplemental data:
Expenses ## 1.85% 1.85% 1.79%+ 1.77% 1.79% 1.36%+
Net investment income 7.99% 7.79% 6.94%+ 8.02% 8.01% 5.92%+
Portfolio turnover 59% 59% 68% 59% 59% 68%
Net assets at end of period (000,000 omitted) $ 283 $ 286 $ 371 $ 16 $ 3 $ 1
<FN>
* For the period from the commencement of offering of Class B shares, September 27, 1993 to January 31, 1994.
** For the period from the commencement of offering of Class C shares, January 3, 1994 to January 31, 1994.
+ Annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
++ Includes per share distributions from net investment income and in excess of net investment income of $0.004 and $0.001,
respectively.
</FN>
</TABLE>
See notes to financial statements
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS High Income Fund (the Fund) is a diversified series of MFS Series Trust III
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
Investment ValuationS - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Equity securities listed on securities exchanges or reported through the NASDAQ
system are valued at last sale prices. Unlisted equity securities or listed
equity securities for which last sale prices are not available are valued at
last quoted bid prices. Securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
The Fund can invest up to 100% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher rated securities,
and tend to be more sensitive to economic conditions.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are reported as realized losses. Ongoing costs incurred to
protect or enhance an investment, or costs incurred to pursue other claims or
legal actions, are reported as operating expenses.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
deposited with the custodian by the Fund. This amount is shown as a reduction of
expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return, and consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended January 31, 1996, $4,407,504 was reclassified from
accumulated undistributed net investment income to accumulated net realized loss
on investments and $1,898,607 was reclassified from paid-in-capital to net
realized loss on investments, due to differences between book and tax accounting
for defaulted securities and distributions. This change had no effect on the net
assets or net asset value per share. At January 31, 1996, accumulated
undistributed net investment income under book accounting was different from tax
accounting due to temporary differences in accounting for distributions and
accruing interest income.
At January 31, 1996, the Fund, for federal income tax purposes, had a capital
loss carryforward of $272,253,863 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration.
The Fund's carryforward losses expire as shown in the following table:
Year Ending January 31, Amount
================================================================================
1997 $ 3,134,316
1998 30,407,582
1999 91,805,710
2000 64,105,312
2001 16,884,352
2003 30,373,319
2004 35,661,057
------------
Total $272,371,648
============
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees.
Shareholders of each class also bear certain expenses that pertain only to that
particular class. All shareholders bear the common expenses of the Fund pro rata
based on the average daily net assets of each class, without distinction between
share classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.19% of average daily net assets and 2.66% of gross income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $22,646 for the year ended
January 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$136,238 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for each class of
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum (currently reduced to a maximum of 0.15% per annum for shares
purchased prior to March 1, 1991) of the Fund's average daily net assets
attributable to Class A shares which are attributable to that securities dealer,
a distribution fee to MFD of up to 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares, commissions to dealers and payments
to MFD wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. MFD retains the
service fee for accounts not attributable to a securities dealer which amounted
to $279,857 for the year ended January 31, 1996. Fees incurred under the
distribution plan during the year ended January 31, 1996, were 0.21% of average
daily net assets attributable to Class A shares on an annualized basis.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $66,724 and $1,136 for Class B and Class C
shares, respectively, for the year ended January 31, 1996. Fees incurred under
the distribution plans during the year ended January 31, 1996, were 0.25% and
1.00% of average daily net assets attributable to Class B and Class C shares on
an annualized basis, respectively.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within 12 months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended January 31, 1996, were $1,729 and $490,067
for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$522,465,395 and $487,516,995, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 879,632,558
=============
Gross unrealized appreciation $ 49,316,805
Gross unrealized depreciation (42,399,110)
-------------
Net unrealized appreciation $ 6,917,695
=============
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares 1996 1995
---------------------------- -----------------------------
Year Ended January 31, Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 43,551,810 $ 222,082,736 41,588,518 $ 207,747,317
Shares issued to shareholders in
reinvestment of distributions 5,871,784 30,043,510 5,157,706 25,825,727
Shares reacquired (39,142,858) (200,253,761) (55,887,292) (285,808,664)
----------- ------------ ----------- ------------
Net increase (decrease) 10,280,736 $ 51,872,485 (9,141,068) $ (52,235,620)
=========== ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares 1996 1995
---------------------------- -----------------------------
Year Ended January 31, Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 37,144,640 $ 188,766,014 35,621,772 $ 179,566,752
Shares issued to shareholders in
reinvestment of distributions 2,276,017 11,631,868 2,069,901 10,362,543
Shares reacquired (44,373,502) (226,482,750) (46,104,410) (236,279,771)
----------- ------------ ----------- ------------
Net decrease (4,952,845) $ (26,084,868) (8,412,737) $ (46,350,476)
=========== ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
Class C Shares 1996 1995
---------------------------- -----------------------------
Year Ended January 31, Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 4,854,733 $ 24,711,921 1,348,486 $ 6,819,387
Shares issued to shareholders in
reinvestment of distributions 87,659 449,963 26,459 131,435
Shares reacquired (2,541,586) (12,938,624) (856,606) (4,295,976)
----------- ------------ ----------- ------------
Net increase 2,400,806 $ 12,223,260 518,339 $ 2,654,846
=========== ============ =========== =============
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended January 31,
1996 was $11,099.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(7) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the year ended January
31, 1996 is set forth below:
<TABLE>
<CAPTION>
Acquisitions Dispositions
Beginning ----------------- ---------------------- Ending Interest and
Share/Par Share/Par Share/Par Share/Par Realized Dividend Ending
Affiliate Amount Amount Cost Amount Cost Amount (Loss) Income Value
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Calton, Inc. 2,009,444 -- 2,009,444 $ 5,293,207 -- $(4,479,193) $ -- $ --
Mayflower
Group, Inc. 783,919 -- 783,919 10,177,876 -- (2,048,636) --
Ranger
Industries,
Inc. 266,768 -- -- -- -- 266,768 -- 26,677
---- --------- ----------- ------- ----------- ------ --------
-- $15,471,083 $(6,527,829) -- $ 26,677
==== ========= =========== ======= =========== ====== ========
</TABLE>
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At January 31, 1996, the
Fund owned the following restricted securities (constituting 4.05% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933 (the 1933 Act). The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers or, if not available, in
good faith by or at the direction of the Trustees. Certain of these securities
may be offered and sold to "qualified institutional buyers" under Rule 144A of
the 1933 Act.
<TABLE>
<CAPTION>
Date of Share/Par
Description Acquisition Amount Cost Value
===========================================================================================================================
<S> <C> <C> <C> <C>
Alabama Outdoor Advertising, Inc., 10s, 1996 3/28/91 422,332 $ 354,068 $ 316,749
American Communications Services, Inc., 13s, 2005+ 11/09/95 3,100,000 1,658,965 1,751,500
Coast Hotels and Casino, 13s, 2002+ 1/23/96 3,625,000 3,505,049 3,547,969
Continental Cablevision, Inc., 8.3s, 2006+ 12/08/95 9,150,000 9,120,628 9,207,187
Envirosource, Inc. 5/15/91 1,666 7,289 6,039
Four Seasons Hotels, Inc., 9.125s, 2000+ 6/23/93 7,750,000 7,700,788 7,750,000
Gillett Holdings, Inc. 2/27/92 85,019 872,850 1,785,399
Grand Palais Casinos, Warrant+ 111,660 -- --
Howmet Corp. 10s, 2003+ 11/95-1/96 2,850,000 2,966,000 3,021,000
Interlake Revolver, "B", 5.75s, 1997+ 1,662,506 1,484,262 1,654,193
Merrill Lynch Mortgage Investors, Inc.,
1994-M1, 8.07s, 2023 6/22/94 4,500,000 3,119,063 3,535,312
Remington Arms, Inc., 9.5s, 2003+ 11/19/93 2,000,000 1,987,500 1,640,000
Rifkin Acquisition Partners LP, 11.125s, 2006+ 1/26/96 3,000,000 3,000,000 3,060,000
-----------
$37,275,348
===========
</TABLE>
+ SEC Rule 144A restriction.
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust III and the Shareholders of MFS High
Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS High Income Fund as of January 31, 1996,
the related statement of operations for the year then ended, the statement of
changes in net assets for the years ended January 31, 1996 and 1995, and the
financial highlights for each of the years in the ten-year period ended January
31, 1996. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
January 31, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS High Income Fund
at January 31, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE llp
Boston, Massachusetts
March 1, 1996
------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
25
<PAGE>
A FINANCIAL ADVISER CAN HELP YOU BE A BETTER INVESTOR
Financial advisers can be valuable resources for their clients, providing
ongoing education and guidance about investments, as well as a wide range of
services. Here are just some of the ways your financial adviser may be able to
help you be a better investor:
# Day-to-day monitoring of your portfolio
# Tax recordkeeping
# In-depth information on fund managers, their track records and their tenure
# Risk/reward analyses of current or potential holdings
# Asset allocation advice
# Construction of a detailed personal financial profile
# Order and confirmation processing
# Information on a fund group's range of shareholder services
# Portfolio adjustments based on lifestyle changes
# Assistance with business retirement planning
# Evaluation of lump-sum distribution options
# Recommendations on a selection of fund groups
# Specialized research and investment information not readily available to
individuals
# In-depth knowledge of markets and products, kept current by ongoing tracking
# Estate, tax, insurance, and business planning
# Help with possible savings on sales charges through breakpoints, rights of
accumulation, and letters of intent
26
<PAGE>
A WORD ABOUT MFS PRODUCTS AND SERVICES
MAKING ADDITIONAL INVESTMENTS AT YOUR CONVENIENCE
There are several easy ways to make additional single investments of at
least $50:
o send a check with the lower portion of your account statement
o contact your financial adviser to purchase shares on your behalf
o wire additional investments through your bank; call us first for
instructions.
MAKING ADDITIONAL INVESTMENTS AUTOMATICALLY
By investing a set amount at regular intervals, over time you will buy more
shares when prices are low, and fewer shares when prices are high. Because
dollar cost averaging involves periodic purchases regardless of fluctuating
share prices, you should consider your financial ability to continue investing
in periods of low prices. MFS offers two dollar-cost-averaging programs. See the
prospectus for further details. Dollar cost averaging does not assure a profit
or avoid a loss.
THE AUTOMATIC INVESTMENT PLAN offers a simple way to make regular investments of
at least $50 through automatic withdrawals from your checking account.
THE AUTOMATIC EXCHANGE PLAN automatically exchanges shares from any MFS fund
with $5,000 or more into the same class of shares in up to four other MFS funds.
You choose the amounts of the exchanges (as little as $50) and their frequency.
A HYPOTHETICAL EXAMPLE OF AUTOMATIC MONTHLY INVESTING
COMPOUNDING AT 8% YEAR
Amount 5 Years 10 15 20 25
----------------------------------------------------------------
$50 3,671 9,064 16,989 28,633 45,742
$75 5,506 13,596 25,483 42,950 68,613
$100 7,341 18,128 33,978 57,266 91,484
$200 14,683 36,257 67,956 114,532 182,968
For illustration only. Not indicative of future performance of any MFS fund.
For applications or further information call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
If you are a participant in a retirement plan, check with your plan sponsor
regarding the availability of these options.
27
<PAGE>
MFS INVESTMENT OPPORTUNITIES
MUTUAL FUNDS
The MFS Family of Funds, shown on the facing page, falls into the eight general
categories below. All offer full-time professional management, a diversified
portfolio, and a wide array of shareholder services.
STOCK FUNDS seek growth of capital rather than income through investments in
stocks.
STOCK AND BOND FUNDS seek current income and growth of capital through
investments in both stocks and bonds.
BOND FUNDS seek current income through investments in debt securities.
WORLD FUNDS seek stock, balanced, and bond fund objectives through investments
in U.S. and foreign stocks and bonds.
LIMITED-MATURITY FUNDS seek current income and preservation of capital through
investments in debt securities with remaining maturities of five years or less.
NATIONAL TAX-FREE BOND FUNDS seek current income exempt from federal income tax
through investments in debt securities issued by states and municipalities.[1]
STATE TAX-FREE BOND FUNDS seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state and
its municipalities.[1]
MONEY MARKET FUNDS seek preservation of capital and current income through
investments in short-term debt securities.[2]
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information for
literature[3] on MFS products and services: 1-800-637-2929, from 9 a.m. to 5
p.m. Eastern time any business day (leave a message anytime).
[1] A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
[2] Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the fund will be able to maintain
a stable net asset value.
[3] Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
28
<PAGE>
THE MFS FAMILY OF FUNDS [Registration Mark]
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
STOCK
================================================================================
Massachusetts Investors Trust
- --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Capital Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Emerging Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Gold & Natural Resources Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Growth Opportunities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Managed Sectors Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] OTC Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Research Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Value Fund
- --------------------------------------------------------------------------------
STOCK AND BOND
================================================================================
MFS [Registration Mark] Total Return Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Utilities Fund
- --------------------------------------------------------------------------------
BOND
================================================================================
MFS [Registration Mark] Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Mortgage Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Securities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] High Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Intermediate Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Strategic Income Fund
- --------------------------------------------------------------------------------
LIMITED MATURITY BOND
================================================================================
MFS [Registration Mark] Government Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Limited Maturity Fund
- --------------------------------------------------------------------------------
WORLD
================================================================================
MFS [Registration Mark]/Foreign & Colonial Emerging Market Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth and Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Asset Allocation Fund [Service Mark]
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Governments Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Total Return Fund
- --------------------------------------------------------------------------------
NATIONAL TAX-FREE BOND
================================================================================
MFS [Registration Mark] Municipal Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal High Income Fund
(closed to new investors)
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Income Fund
- --------------------------------------------------------------------------------
STATE TAX-FREE BOND
================================================================================
Alabama, Arkansas, California, Florida, Georgia, Louisiana, Maryland,
Massachusetts, Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
- --------------------------------------------------------------------------------
MONEY MARKET
================================================================================
MFS [Registration Mark] Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Money Market Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Money Market Fund
- --------------------------------------------------------------------------------
<PAGE>
MFS [Registration Mark] High [Dalbar Logo] Bulk Rate
Income Fund U.S. Postage
PAID
500 Boylston Street Permit #55638
Boston, MA 02116 Boston, MA
[MFS LOGO]
The first name in Mutual Funds
MHI-2 3/96 66M 18/218/318
<PAGE>
PROSPECTUS
MFS(R) MUNICIPAL June 1, 1996
HIGH INCOME FUND Class A Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class B Shares of Beneficial Interest
- -------------------------------------------------------------------------------
Page
----
1. Expense Summary ....................................................... 2
2. The Fund .............................................................. 3
3. Condensed Financial Information ....................................... 4
4. Investment Objective and Policies ..................................... 5
5. Investment Techniques ................................................. 6
6. Additional Risk Factors ............................................... 9
7. Management of the Fund ................................................ 11
8. Information Concerning Shares of the Fund ............................. 12
Purchases ......................................................... 12
Exchanges ......................................................... 15
Redemptions and Repurchases ....................................... 16
Class B Distribution Plan ......................................... 18
Distributions ..................................................... 19
Tax Status ........................................................ 19
Net Asset Value ................................................... 20
Description of Shares, Voting Rights and Liabilities .............. 20
Performance Information ........................................... 21
9. Shareholder Services .................................................. 21
Appendix A ........................................................ A-1
Appendix B ........................................................ B-1
Appendix C ........................................................ C-1
Appendix D ........................................................ D-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS MUNICIPAL HIGH INCOME FUND 500 Boylston Street, Boston, MA 02116
(617) 954-5000
The investment objective of MFS Municipal High Income Fund (the "Fund") is to
provide high current income exempt from federal income taxes. The Fund seeks
to achieve this objective by investing its assets primarily in municipal bonds
and notes which may be of medium and lower quality (see "Investment Objective
and Policies"). The Fund is a non-diversified series of MFS Series Trust III
(the "Trust"), an open-end investment company.
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN LOWER-RATED MUNICIPAL
BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING
DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD
CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK FACTORS
- -- LOWER RATED MUNICIPAL BONDS").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The
Trust, on behalf of the Fund, has filed with the Securities and Exchange
Commission (the "SEC") a Statement of Additional Information (the "SAI"),
dated June 1, 1996, as amended or supplemented from time to time, which
contains more detailed information about the Trust and the Fund. The SAI is
incorporated into this Prospectus by reference. See page 23 for a further
description of the information set forth in the SAI. A copy of the SAI may be
obtained without charge by contacting the Shareholder Servicing Agent (see
back cover for address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares (as a
percentage of offering price) ........................................ 4.75% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase or redemption proceeds, as
applicable) .......................................................... See Below(1) 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ........................................................ 0.67% 0.67%
Rule 12b-1 Fees ........................................................ 0% 0.90%(2)
Other Expenses(3) ...................................................... 0.26% 0.34%
---- ----
Total Operating Expenses ............................................... 0.93% 1.91%
- ----------
(1) Purchases of $1 million or more and certain purchases by retirement plans are not subject to an
initial sales charge; however, a Contingent Deferred Sales Charge (a "CDSC") of 1% will be
imposed on such purchases in the event of certain redemption transactions within 12 months
following such purchases (see "Information Concerning Shares of the Fund -- Purchases" below).
(2) The Fund has adopted a Distribution Plan for its Class B shares in accordance with Rule 12b-1
under the Investment Company Act of 1940, as amended (the "1940 Act"), which provides that it
will pay distribution/ service fees aggregating up to (but not necessarily all of) 1.00% per
annum of the average daily net assets attributable to the Class B shares (see "Information
Concerning Shares of the Fund -- Class B Distribution Plan" below). Except in the case of the
0.25% per annum Class B service fee paid by the Fund upon the sale of Class B shares, payment of
the Class B service fee will be suspended until such date as the Trustees of the Trust may
determine. Distribution expenses paid under this Plan, together with any CDSC payable upon
redemption of Class B shares, may cause long- term shareholders to pay more than the maximum
sales charge that would have been permissible if imposed entirely as an initial sales charge.
(3) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the
amount of cash maintained by the Fund with its custodian and dividend disbursing agent, and may
enter into other such arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are not reflected under
"Other Expenses."
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B
------ ------- ------------------------------
(1)
1 year ....................... $ 57 $ 59 $ 19
3 years ...................... 76 90 60
5 years ...................... 97 123 103
10 years ...................... 156 198(2) 198(2)
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table provided above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund
will bear directly or indirectly. More complete descriptions of the following
expenses of the Fund are set forth in the following sections of the
Prospectus: (i) varying sales charges on share purchases -- "Purchases"; (ii)
varying CDSCs -- "Purchases"; (iii) management fees -- "Investment Adviser";
and (iv) Rule 12b-1 (i.e., distribution plan) fees -- "Class B Distribution
Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
<PAGE>
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of
The Commonwealth of Massachusetts in 1977. The Trust presently consists of two
series, each of which represents a portfolio with separate investment
policies. Two classes of shares of the Fund are offered to the general public.
Class A shares are offered at net asset value plus an initial sales charge up
to a maximum of 4.75% of the offering price (or a CDSC of 1.00% upon
redemption during the first year in the case of certain purchases of $1
million or more and certain purchases by retirement plans) and are subject to
an annual distribution fee and service fee up to a maximum of 0.35% per
annum). Class B shares are offered at net asset value without an initial sales
charge but are subject to a CDSC upon redemption (declining from 4.00% during
the first year to 0% after 6 years) and an annual distribution fee and service
fee up to a maximum of 1.00% per annum. Class B shares will convert to Class A
shares approximately eight years after purchase. The Fund buys securities
(primarily municipal bonds and notes that may be in the medium or lower rating
categories or may be unrated, the interest on which is exempt from federal
income tax) for its portfolio.
In June 1985, the Trust's Board of Trustees decided to terminate sales of Fund
shares, other than to the Fund's shareholders, because the Fund had attained
optimal size for management purposes. The Board of Trustees voted to re-open
the Fund for sales to new shareholders for the period from March 1, 1989 to
the close of business on March 23, 1989. During such period the Fund's net
assets increased by approximately $109 million as a result of such additional
investments. The Board of Trustees voted again to re-open the Fund for sales
to new shareholders for the period from February 6, 1990 to the close of
business on February 7, 1990. During such period, the Fund's net assets
increased by approximately $205 million as a result of such additional
investments. On February 28, 1990, the sale of Fund shares to existing
shareholders (other than through the reinvestment of dividends and capital
gains of the Fund) was terminated. On November 5, 1990, Fund shares were made
available for sale to existing shareholders only. Upon a vote by the Board of
Trustees, the Fund was again reopened for sales to new shareholders for one
day, June 3, 1994. During such day, the Fund's net assets increased by
approximately $189 million as a result of such additional investments.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. MFS is the Fund's investment adviser. A majority of the Trustees are
not affiliated with the Adviser. The Adviser is responsible for the management
of the assets of the Fund and the officers of the Trust are responsible for
the Fund's operations. The Adviser manages the Fund's portfolio from day to
day in accordance with the investment objective and policies of the Fund. The
selection of investments and the way they are managed depend on the conditions
and trends in the economy and the financial marketplaces. The Fund also offers
to buy back (redeem) its shares from its shareholders at any time at their net
asset value, less any applicable CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the
Fund's independent auditors, given upon their authority as experts in
accounting and auditing. The Fund's independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ........ $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income ...... $ 0.61 $ 0.64 $ 0.77 $ 0.73 $ 0.73 $ 0.74
Net realized and unrealized
gain (loss) on investments 0.59 (0.75) 0.05 0.06 0.17 (0.32)
------ ------ ------ ------ ------ ------
Total from investment
operations ............. $ 1.20 $(0.11) $ 0.82 $ 0.79 $ 0.90 $ 0.42
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income $(0.68) $(0.67) $(0.70) $(0.75) $(0.77) $(0.78)
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.68) $(0.67) $(0.70) $(0.75) $(0.77) $(0.78)
------ ------ ------ ------ ------ ------
Net asset value - end of
period ..................... $ 9.12 $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09
====== ====== ====== ====== ====== ======
Total return++ ............... 13.92% (1.04)% 9.19% 9.02% 10.34% 4.65%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ................. 0.93% 1.04% 1.10% 1.00% 1.03% 1.05%
Net investment income....... 6.83% 7.27% 7.15% 7.95% 7.96% 8.17%
PORTFOLIO TURNOVER ........... 20% 32% 18% 10% 21% 41%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .............. $1,009,031 $920,043 $809,957 $731,968 $648,043 $638,185
<FN>
# Per share data for the periods subsequent to January 31, 1995 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------------------
1990 1989 1988 1987 1986 1995 1994*
---- ---- ---- ---- ---- ---- ----
CLASS A CLASS B
------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period .................. $ 9.55 $ 9.68 $10.38 $10.49 $ 8.60 $ 9.38 $ 9.40
------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income ...... $ 0.85 $ 0.88 $ 0.84 $ 0.99 $ 0.52 $ 0.57 $ 0.32
Net realized and unrealized
gain (loss) on investments (0.09) (0.12) (0.67) (0.01) 0.59 (0.78) (0.14)
------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............. $ 0.76 $ 0.76 $ 0.17 $ 0.98 $ 1.11 $ (0.21) $ 0.18
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income . $(0.81) $(0.82) $(0.84) $(1.01) $(0.59) $(0.57) $(0.20)
From net realized gain on
investments .............. (0.04) (0.07) (0.03) (0.08) -- -- --
From paid-in capital ....... (0.01) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.86) $(0.89) $(0.87) $(1.09) $(0.59) $(0.57) $(0.20)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $ 9.45 $ 9.55 $ 9.68 $10.38 $ 9.12 $ 8.60 $ 9.38
====== ====== ====== ====== ====== ====== ======
Total return++ ............... 8.24% 8.32% 1.87% 10.00% 12.78% (2.13)% 1.89%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ................. 1.02% 0.65% 1.03% 1.00% 1.91% 2.10% 2.04%+
Net investment income....... 8.90% 9.27% 8.54% 9.54% 5.84% 6.32% 5.43%
PORTFOLIO TURNOVER ........... 21% 23% 16% 9% 20% 32% 18%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .............. $485,037 $325,044 $349,655 $442,036 $77,808 $55,675 $1
- --------------
<FN>
* For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
# Per share data for the periods subsequent to January 31, 1995 is based on average shares outstanding.
+ Annualized.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales charge (except for reinvestment dividends prior
to October 1, 1989). If the sales charge had been included, the results would have been lower.
</TABLE>
<PAGE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of the Fund is to provide
high current income exempt from federal income taxes. Any investment involves
risk and there can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES -- The Fund seeks to achieve its investment objective by
investing primarily (i.e., at least 80% of its assets under normal
circumstances) in debt securities issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their political subdivisions, agencies or instrumentalities, the interest on
which is exempt from federal income tax ("Municipal Bonds" or "tax-exempt
securities"). The interest income on certain of these obligations may be
subject to an alternative minimum tax, which is considered to be tax-exempt
for purposes of the 80% test described above. Under normal circumstances, the
Fund will invest at least 65% of its total assets in tax-exempt securities
which offer a current yield above that generally available on tax-exempt
securities in the three highest rating categories of the recognized rating
agencies (commonly known as "junk bonds" if rated below the four highest
categories of recognized rating agencies). For a comparison of yields on
Municipal Bonds and taxable securities, see Appendix B to this Prospectus, for
a general discussion on Municipal Bonds and their rating categories, see
Appendix C, and for a chart showing the Fund's fixed income securities broken
down by rating category, see Appendix D. The Fund may invest up to 100% of its
net assets in these lower-rated securities. Such high risk securities
generally involve greater volatility of price and greater risk of nonpayment
of principal and interest (including the possibility of default by or
bankruptcy of the issuers of such securities) than securities in higher rating
categories. See "Additional Risk Factors -- Lower-Rated Municipal Bonds"
below. However, since available yields and yield differentials vary over time,
no specific level of income or yield differential can ever be assured. Also,
any income earned on portfolio securities would be reduced by the expenses of
the Fund before it is distributed to shareholders.
The value of the tax-exempt securities that the Fund intends to purchase may
be less sensitive to market factors than other securities; however, they may
be more sensitive to changes in the perception of the credit quality of such
securities, or of similar types of securities or of securities issued within
the same geographical region. Changes in the value of securities subsequent to
their acquisition will not affect income or yields to maturity of the Fund's
portfolio securities but will be reflected in the net asset value of the
shares of the Fund. In order to preserve or enhance the value of its
investments, the Fund may, on occasion, make additional capital expenditures
beyond the initial cost of an investment. The Fund will seek to reduce risk
through diversification, credit analysis and attention to current developments
and trends in both the economy and financial markets.
The net asset value of the shares of an open-end investment company, such as
the Fund, which invests primarily in fixed income tax-exempt securities,
changes as the general levels of interest rates fluctuate. When interest rates
decline, the value of a portfolio invested at higher yields can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested
at lower yields can be expected to decline.
When the Adviser believes that investing for temporary defensive purposes is
appropriate, such as during periods of unusual market conditions or at times
when yield spreads are narrow and the higher yields do not justify the
increased risk or if acceptable quantities of higher yielding securities are
unavailable, the Fund may either invest in tax-exempt securities in the higher
rating categories of recognized rating agencies (that is, ratings of A or
higher by Moody's, S&P or Fitch or comparable unrated tax-exempt securities)
or in cash or cash equivalent short-term obligations of similar quality (i.e.,
with ratings equivalent to A or better by Moody's, S&P or Fitch or comparable
unrated tax-exempt securities) including, but not limited to, short-term
municipal obligations, certificates of deposit, commercial paper, short-term
notes, obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities and repurchase agreements. From time to time, a
portion of the Fund's distributions will be taxable to shareholders (e.g.,
distributions of income from taxable obligations, from capital gains, from
transactions in certain Municipal Bonds purchased at market discount and from
certain other transactions).
The Fund may invest in a relatively high percentage of municipal bonds issued
by entities having similar characteristics. The issuers may be located in the
same geographic area, or may pay interest on their obligations from revenue of
similar projects such as hospitals, electric utility systems, multi-family
housing, nursing homes, commercial facilities (including hotels), steel
companies or life care facilities. This may make the Fund more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation of the net asset value of
shares of the Fund also increases.
The Fund reserves the right to invest more than 25% of its assets in
industrial revenue bonds, including industrial revenue bonds issued for
hospitals, electric utility systems, multi-family housing, nursing homes,
commercial facilities (including hotels), steel companies and life care
facilities. See the SAI for a discussion of the risks which these investments
might entail. Certain of the bonds issued for these purposes provide financing
for construction or rehabilitation of facilities as described above. As such
they are susceptible to various construction related risks, including labor
costs and environmental, zoning and site development considerations, as well
as the ability of contractors to perform within time and cost constraints.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. See "Information Concerning Shares of the Fund --
Tax Status" below for the effect of current federal tax law on this exemption.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described
more fully in the SAI. See "Investment Objective, Policies and Restrictions"
in the SAI.
ZERO COUPON BONDS: Municipal Bonds in which the Fund may invest also include
zero coupon bonds. Zero coupon bonds are debt obligations which are issued at
a significant discount from face value and do not require the periodic payment
of interest. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity or the first interest
payment date at a rate of interest reflecting the market rate of the security
at the time of issuance. Zero coupon bonds benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of
return to attract investors who are willing to defer receipt of such cash.
Such investments may experience greater volatility in market value due to
changes in interest rates than debt obligations which make regular payments of
interest. The Fund will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's distribution
obligations. Because of the higher rates of return, such investments are
regarded by the Fund as consistent with its investment objective.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so called "inverse
floating rate obligations" or "residual interest" bonds, or other obligations
or certificates relating thereto structured to have similar features. Such
obligations generally have floating or variable interest rates that move in
the opposite direction of short-term interest rates and generally increase or
decrease in value in response to changes in short-term interest rates at a
rate which is a multiple (typically two) of the rate at which fixed-rate long-
term tax-exempt securities increase or decrease in response to such changes.
As a result, such obligations have the effect of providing investment leverage
and may be more volatile than long-term fixed rate tax exempt obligations.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its
assets in loans. By purchasing a loan, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, and most impose restrictive covenants
which must be met by the borrower. These loans are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans may be in default at the time of
purchase. The Fund may also purchase trade or other claims against companies,
which generally represent money owed by the company to a supplier of goods and
services. These claims may also be purchased at a time when the company is in
default. Certain of the loans acquired by the Fund may involve revolving
credit facilities or other standby financing commitments which obligate the
Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and
other direct investments may not be in the form of securities or may be
subject to restrictions on transfer, and only limited opportunities may exist
to resell such instruments. As a result, the Fund may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value.
"WHEN-ISSUED" SECURITIES: Some tax-exempt securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations will be delivered to the Fund at a future date, usually beyond
customary settlement time. The commitment to purchase a security for which
payment will be made on a future date may be deemed a separate security.
Although the Fund is not limited as to the amount of tax-exempt securities for
which it has such commitments, it is expected that under normal circumstances,
the Fund will not commit more than 30% of its assets to such purchases. The
Fund does not pay for the securities until received, and does not start
earning interest on the securities until the contractual settlement date. In
order to invest its assets immediately while awaiting delivery of securities
purchased on such bases, the Fund will normally invest in short-term
securities that offer same-day settlement and earnings, but that may bear
interest at a lower rate than longer-term securities; however, the Fund also
may invest in longer-term securities. It is the intention of the Fund that
these investments will usually be in securities the interest on which is
exempt from federal income tax.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to interest rates, commodities, indices or other financial indicators.
Most indexed securities are short to intermediate term fixed-income securities
whose values at maturity (i.e. principal value) or interest rates rise or fall
according to the change in one or more specified underlying instruments.
Indexed securities may be positively or negatively indexed (i.e., their
principal value or interest rates may increase or decrease if the underlying
instrument appreciates), and may have return characteristics similar to direct
investments in the underlying instrument or to one or more options on the
underlying instrument. Indexed securities may be more volatile than the
underlying instrument itself.
OPTIONS ON SECURITIES: The Fund intends to write (sell) "covered" put and call
options on fixed income securities. Call options written by the Fund give the
holder the right to buy the underlying securities from the Fund at a fixed
exercise price up to a stated expiration date or, in the case of certain
options, on such date. Put options written by the Fund give the holder the
right to sell the underlying securities to the Fund during the term of the
option at a fixed exercise price up to a stated expiration date or, in the
case of certain options, on such date. Call options are "covered" by the Fund,
for example, when it owns the underlying securities, and put options are
"covered" by the Fund, for example, when it has established a segregated
account of cash or short-term money market instruments which can be liquidated
promptly to satisfy any obligation of the Fund to purchase the underlying
securities. The Fund may also write straddles (combinations of puts and calls
on the same underlying security). Such transactions generate additional
premium income but also include greater risk.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. The amount of the premium will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option,
supply and demand and interest rates. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration
by entering into a closing purchase transaction in which it purchases an
option having the same terms as the option written. It is possible, however,
that illiquidity in the options markets may make it difficult from time to
time for the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce
the benefit, if any, realized by the Fund upon exercise of the option, and,
unless the price of the underlying security changes sufficiently, the option
may expire without value to the Fund.
The Fund intends to write and purchase options on securities for hedging
purposes and also in an effort to increase current income, which involves
greater risk. Options on securities that are written or purchased by the Fund
will be traded on U.S. exchanges and over-the-counter.
The Fund may purchase detachable call options on municipal securities, which
are options issued by an issuer of the underlying municipal securities giving
the purchaser the right to purchase the securities at a fixed price, up to a
stated time in the future, or in some cases, on a future date.
In addition, the Fund may purchase warrants on fixed income securities. A
warrant on a fixed income security is a long-dated call option conveying to
the holder of the warrant the right, but not the obligation, to purchase a
fixed income security of a specific description (from the issuer) on a certain
date or dates (the exercise date) at a fixed exercise price.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and
sell futures contracts on fixed income securities or indices of such
securities, including Municipal Bond indices and any other indices of fixed
income securities which may become available for trading ("Futures
Contracts"). The Fund may also purchase and write options on such Futures
Contracts ("Options on Futures Contracts"). These instruments will be used to
hedge against anticipated future changes in interest rates which otherwise
might either adversely affect the value of the Fund's portfolio securities or
adversely affect the prices of securities which the Fund intends to purchase
at a later date. Should interest rates move in an unexpected manner, the Fund
may not achieve the anticipated benefits of the hedging transactions and may
realize a loss. Such transactions may also be entered into for non-hedging
purposes to the extent permitted by applicable law, which involves greater
risk and may result in losses which are not offset by gains on other portfolio
assets.
In order to assure that the Fund will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the Commodity
Futures Trading Commission (the "CFTC") require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums
on such non-hedging positions does not exceed 5% of the liquidation value of
the Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the
value of the Fund's total assets. Moreover, the Fund will not purchase put and
call options on securities or on Futures Contracts, if as a result, more than
5% of its total assets would be invested in such options.
Futures Contracts and Options on Futures Contracts that are entered into by
the Fund will be traded on U.S. exchanges.
PORTFOLIO TRADING: The Fund intends to engage in portfolio trading rather than
holding all portfolio securities to maturity. In trading portfolio securities,
the Fund seeks to take advantage of market developments, yield disparities and
variations in the creditworthiness of issuers.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., (the
"NASD") and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute the
portfolio transactions of the Fund. From time to time, the Adviser may direct
certain portfolio transactions to broker-dealer firms which, in turn, have
agreed to pay a portion of the Fund's operating expenses (e.g., fees charged
by the custodian of the Fund's assets). For a further discussion of portfolio
trading, see "Portfolio Trading" in the Fund's SAI.
----------------
The investment objective and policies of the Fund described above may be
changed without shareholder approval.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the investment policies of the
Fund. Except as otherwise indicated, the Fund's specific investment
restrictions listed in the SAI may be changed without the approval of the
shareholders of the Fund unless indicated otherwise (see "Investment
Restrictions" in the SAI). The Fund's investment limitations and policies are
adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
6. ADDITIONAL RISK FACTORS
LOWER-RATED MUNICIPAL BONDS: Tax-exempt securities offering the high current
income sought by the Fund are ordinarily in the medium and lower rating
categories of recognized rating agencies or are unrated and, therefore,
generally are high risk securities involving greater volatility of price
(especially during periods of economic uncertainty or change) and risk of
principal (including the possibility of default by or bankruptcy of the
issuers of such securities) and income than securities in the higher rating
categories and because yields vary over time, no specific level of income can
ever be assured. No minimum rating is required by the Fund. In particular,
securities rated BBB by Standard & Poor's Ratings Services ("S&P") or Fitch
Investors Service, Inc. ("Fitch") or Baa by Moody's Investors Service, Inc.
("Moody's") or comparable unrated securities, while normally exhibiting
adequate protection parameters, have speculative characteristics and changes
in economic conditions and other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than in the case of
higher grade Municipal Bonds. Securities rated lower than BBB by S&P or Fitch
or Baa by Moody's or comparable unrated securities (high risk securities) are
considered speculative. While such high risk securities may have some quality
and protective characteristics, they can be expected to be outweighed by large
uncertainties or major risk exposures to adverse conditions. These Municipal
Bonds will be affected by the market's perception of their credit quality,
economic changes and the outlook for economic growth to a greater extent than
higher rated securities which react primarily to fluctuations in the general
level of interest rates. Medium and lower-rated Municipal Bonds are also
affected by changes in interest rates, as noted in "Investment Objective and
Policies" above. Furthermore, an economic downturn may result in a higher
incidence of defaults by issuers of these securities. During certain periods,
the higher yields on the Fund's lower-rated high yielding fixed income
securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, the Fund may continue to earn the same
level of interest income while its net asset value declines due to portfolio
losses, which could result in an increase in the Fund's yield despite the
actual loss of principal.
In addition, medium and lower-rated or unrated tax-exempt securities are
frequently traded only in markets where the number of potential purchasers and
sellers, if any, is very limited. Furthermore, the liquidity of these
securities may be affected by the market's perception of the issuer's credit
quality. Therefore, judgment may at times play a greater role in valuing these
securities than in the case of higher grade tax-exempt securities. This
consideration may also have the effect of limiting the availability of such
securities for the Fund to purchase and may also have the effect of limiting
the ability of the Fund to sell such securities at their fair value either to
meet redemption requests or to respond to changes in the economy or the
financial markets.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the policy of the Fund to rely exclusively on ratings
issued by these agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality. The Fund's
achievement of its investment objective may be more dependent on the Adviser's
own credit analysis than in the case of an investment company investing in
primarily higher quality bonds. With respect to those municipal bonds and
notes which are not rated by a major rating agency, the Fund will be more
reliant on the Adviser's judgment, analysis and experience than would be the
case if such bonds and notes were rated. In evaluating the creditworthiness of
an issuer, whether rated or unrated, the Adviser will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, any operating history of and the community
support for the facility financed by the issue, the ability of the issuer's
management and regulatory matters.
The Adviser will attempt to reduce the risks of investing in medium or lower-
rated or unrated tax-exempt securities to the greatest extent practicable
through portfolio management techniques (see the SAI) and through the use of
credit analysis and Futures Contracts.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: Although the Fund
will enter into certain transactions in options, Futures Contracts and Options
on Futures Contracts for hedging purposes, such transactions nevertheless
involve risks. For example, a lack of correlation between the instrument
underlying an option or Futures Contract and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses. The Fund also may enter into
transactions in options, Futures Contracts and Options on Futures Contracts
for other than hedging purposes, to the extent permitted by applicable law,
which involves greater risk. In addition, there can be no assurance that a
liquid secondary market will exist for any contract purchased or sold, and the
Fund may be required to maintain a position until exercise or expiration,
which could result in losses. The SAI contains a further description of
options, Futures Contracts and Options on Futures Contracts, and a discussion
of the risks related to transactions therein. Transactions entered into for
non-hedging purposes involve greater risk and could result in losses which are
not offset by gains on other portfolio assets.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC and in the over-the-counter market, while Futures Contracts and Options on
Futures Contracts may be entered into on U.S. commodities exchanges regulated
by the CFTC. Over-the-counter transactions involve certain risks which may not
be present in exchange-traded transactions.
Gains recognized from options and futures transactions engaged in by the Fund
are taxable to shareholders upon distribution.
NON-DIVERSIFICATION: The Fund has registered as a "non-diversified" investment
company as that term is defined by the 1940 Act, but intends to qualify as a
"regulated investment company" ("RIC") for federal tax purposes. This means,
in general, that although more than 5% of the Fund's total assets may be
invested in the obligations of one issuer, at the close of each quarter of its
taxable year the aggregate amount of such holdings may not exceed 50% of the
value of its total assets, and no more than 25% of the value of its total
assets may be invested in the obligations of a single issuer. Since the Fund
may invest a relatively high percentage of its assets in the obligations of a
limited number of issuers, the Fund may be more susceptible to any single
economic, political or regulatory occurrence than a diversified investment
company.
For the above reasons, an investment in shares of the Fund should not
constitute a complete investment program and may not be appropriate for
investors who cannot assume the greater risk of capital depreciation or loss
inherent in seeking higher tax-exempt yields.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the assets of the Fund pursuant to an
Investment Advisory Agreement dated September 1, 1993, as amended. MFS
provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Cynthia M. Brown, a Senior
Vice President of the Adviser, has been the Fund's portfolio manager since
1993 and has been employed as a portfolio manager by the Adviser since 1984.
Subject to such policies as the Trustees may determine, MFS makes investment
decisions for the Fund. For these services and facilities, MFS receives a
management fee, computed and paid monthly, in an amount equal to the sum of
0.30% of the first $1.3 billion of the Fund's average daily net asset value
and 0.25% of the amount in excess of $1.3 billion plus 4.75% of the Fund's
gross income (i.e., income other than from the sale of securities), in each
case on an annualized basis for the Fund's then-current fiscal year.
For the Fund's fiscal year ended January 31, 1996, MFS received management
fees under the Fund's Investment Advisory Agreement of $6,996,766, (equivalent
on an annualized basis to 0.67% of the Fund's average daily net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance
Trust, Sun Growth Variable Annuity Fund, Inc., MFS/Sun Life Series Trust and
seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc.,
provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $45.7 billion on behalf of approximately 2 million investor
accounts as of April 30, 1996. As of such date, the MFS organization managed
approximately $6.3 billion of assets in municipal bond securities and
approximately $19.4 billion of assets in fixed income securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, John R. Gardner, John D.
McNeil and Arnold D. Scott. Mr. Brodkin is the Chairman, Mr. Shames is the
President and Mr. Scott is a Senior Executive Vice President and the Secretary
of MFS. Messrs. McNeil and Gardner are the Chairman and the President,
respectively, of Sun Life. Sun Life, a mutual life insurance company, is one
of the largest international life insurance companies and has been operating
in the United States since 1895, establishing a headquarters office here in
1973. The executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President of the Trust. Joan S. Batchelder, Cynthia M. Brown, Matthew N.
Fontaine, Robert J. Manning, Bernard Scozzafava, James T. Swanson, W. Thomas
London, James O. Yost, Stephen E. Cavan and James R. Bordewick, Jr., all of
whom are officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial will share their views on a variety of investment related issues,
such as the economy, securities markets, portfolio securities and their
issuers, investment recommendations, strategies and techniques, risk analysis,
trading strategies and other portfolio management matters. MFS will have
access to the extensive international equity investment expertise of Foreign &
Colonial, and Foreign & Colonial will have access to the extensive U.S. equity
investment expertise of MFS. One or more MFS investment analysts are expected
to work for an extended period with Foreign & Colonial's portfolio managers
and investment analysts at their offices in London. In return, one or more
Foreign & Colonial employees are expected to work in a similar manner at MFS'
Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in
other cases, however, it may produce increased investment opportunities for
the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ("Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Only existing shareholders of the Fund may purchase Class A and Class B
shares. Because of this restriction, certain dealers in the past have
transferred and in the future may transfer a share of the Fund to certain of
their clients interested in becoming shareholders of the Fund so that such
clients will then be able to buy additional shares of the Fund. Subject to the
above restriction, shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to investments in the Fund.
The Fund offers two classes of shares (Class A and B shares) which bear sales
charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- ---------- -----------------
<S> <C> <C> <C>
Less than $100,000 ......................................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ............................................ 4.00 4.17 3.20
$250,000 but less than $500,000 ............................................ 2.95 3.04 2.25
$500,000 but less than $1,000,000 .......................................... 2.20 2.25 1.70
$1,000,000 or more ......................................................... None** None** See Below**
- ----------
<FN>
* Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated using
the percentages above.
** A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the
sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge).
In the following two circumstances, Class A shares are also offered at net
asset value without an initial sales charge but subject to a CDSC, equal to 1%
of the lesser of the value of the shares redeemed (exclusive of reinvested
dividend and capital gain distributions) or the total cost of such shares, in
the event of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended, if the
sponsoring organization demonstrates to the satisfaction of MFD that
either (a) the employer has at least 25 employees or (b) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds will
be in an amount of at least $250,000 within a reasonable period of time,
as determined by MFD in its sole discretion.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
---------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares made on or
after April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ...................................................... 4%
Second ..................................................... 4%
Third ...................................................... 3%
Fourth ..................................................... 3%
Fifth ...................................................... 2%
Sixth ...................................................... 1%
Seventh and following ...................................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
MFD will pay commissions to dealers of 3.75% of the purchase price of Class B
shares purchased through dealers. MFD will also advance to dealers the first
year service fee payable under the Fund's Class B Distribution Plan (see
"Distribution Plans" below) at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of
Class B shares is 4% of the purchase price of the shares (commission rate of
3.75% plus a service fee equal to 0.25% of the purchase price).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of
the Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of
the payment of the distribution and service fees under the Distribution Plan
applicable to Class B shares. See "Distribution Plan" below. However, for
purposes of conversion to Class A shares, all shares in a shareholder's
account that were purchased through the reinvestment of dividends and
distributions paid in respect of Class B shares (and which have not converted
to Class A shares as provided in the following sentence) will be held in a
separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to
Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bears to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B
shares would continue to be subject to higher expenses than Class A shares for
an indefinite period.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
The Fund reserves the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject any specific purchase order or to restrict purchases by a
particular purchaser (or group of related purchasers). The Fund or MFD may
reject or restrict any purchases by a particular purchaser or group, for
example, when such purchase is contrary to the best interests of the Fund's
other shareholders or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are
effected in a timed account in the same calendar quarter or (ii) a purchase
would result in shares being held in timed accounts by market timers
representing more than (x) one percent of the Fund's net assets or (y)
specified dollar amounts in the case of certain MFS Funds which may include
the Fund and which may change from time to time. The Fund and MFD each reserve
the right to request market timers to redeem their shares at net asset value,
less any applicable CDSC, if either of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A and Class B shares. In addition, from time to
time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD,
at its expense, may provide additional commissions, compensation or
promotional incentives ("concessions") to dealers which sell shares of the
Fund. Such concessions provided by MFD may include financial assistance to
dealers in connection with preapproved conferences or seminars, sales or
training programs for invited registered representatives, payment for travel
expenses, including lodging, incurred by registered representatives for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives in group meetings or to help
pay the expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RETIREMENT PLAN ACCOUNTS. Following the termination of any agreement
between a plan sponsor and the Shareholder Servicing Agent or its affiliates
with respect to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing Agent, the
Shareholder Servicing Agent shall combine all plan participant accounts into a
single omnibus or pooled account for each Fund in which the plan invests.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e.,
an established account) may be exchanged for shares of the same class of any
of the other MFS Funds at net asset value (if available for sale).
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of
an MFS Fund to shares of any other MFS Fund, except with respect to exchanges
from an MFS money market fund to another MFS Fund which is not an MFS money
market fund (discussed below). With respect to an exchange involving shares
subject to a CDSC, the CDSC will be unaffected by the exchange and the holding
period for purposes of calculating the CDSC will carry over to the acquired
shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and Units may be exchanged for Class A shares of any MFS Fund. With
respect to exchanges between Class A shares subject to a CDSC and Units, the
CDSC will carry over to the acquired shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth above in this paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before
making any exchange. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by the Shareholder Servicing Agent in proper form (i.e., if in writing
- -- signed by the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record) and each exchange must involve either shares having an
aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by
the Shareholder Servicing Agent) or all the shares in the account. If an
Exchange Request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the New York Stock
Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"), the exchange
will occur on that day if all the requirements set forth above have been
complied with at that time and subject to the Fund's right to reject purchase
orders. No more than five exchanges may be made in any one Exchange Request by
telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to
most non-retirement plan accounts and certain retirement plan accounts. For
further information regarding exchanges by telephone, see "Redemptions by
Telephone." The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers. Special procedures, privileges and
restrictions with respect to exchanges may apply to market timers who enter
into an agreement with MFD, as set forth in such agreement. See "Purchases --
General -- Right to Reject Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800) 225-
2606. Shareholders wishing to avail themselves of this telephone redemption
privilege must so elect on their Account Application, designate thereon a bank
and account number to receive the proceeds of such redemption, and sign the
Account Application Form with the signature(s) guaranteed in the manner set
forth below under the caption "Signature Guarantee." The proceeds of such a
redemption, reduced by the amount of any applicable CDSC and the amount of any
income tax required to be withheld, are mailed by check to the designated
account, without charge, if the redemption proceeds do not exceed $1,000, and
are wired in federal funds to the designated account if the redemption
proceeds exceed $1,000. If a telephone redemption request is received by the
Shareholder Servicing Agent by the close of regular trading on the Exchange on
any business day, shares will be redeemed at the closing net asset value of
the Fund on that day. Subject to the conditions described in this section,
proceeds of a redemption are normally mailed or wired on the next business day
following the date of receipt of the order for redemption. The Shareholder
Servicing Agent will not be responsible for any losses resulting from
unauthorized telephone transactions if it follows reasonable procedures
designed to verify the identity of the caller. The Shareholder Servicing Agent
will request personal or other information from the caller, and will normally
also record calls. Shareholders should verify the accuracy of confirmation
statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of 12 months (in
the case of purchases of $1 million or more of Class A shares or purchases by
certain retirement plans of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a
calendar month, regardless of when during the month the investment occurred,
will age one month on the last day of the month and each subsequent month.
Class B shares purchased on or after January 1, 1993 will be aggregated on a
calendar month basis -- all transactions made during a calendar month,
regardless of when during the month they have occurred, will age one year at
the close of business on the last day of such month in the following calendar
year and each subsequent year. For Class B shares of the Fund purchased prior
to January 1, 1993, transactions will be aggregated on a calendar year basis
- -- all transactions made during a calendar year, regardless of when during the
year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed
without charge ("Free Amount"). Moreover, no CDSC is ever assessed on
additional shares acquired through the automatic reinvestment of dividends or
capital gain distributions ("Reinvested Shares"). Therefore, at the time of
redemption of a particular class, (i) any Free Amount is not subject to the
CDSC and (ii) the amount of the redemption equal to the then-current value of
Reinvested Shares is not subject to the CDSC, but (iii) any amount of the
redemption in excess of the aggregate of the then-current value of Reinvested
Shares and the Free Amount is subject to a CDSC. The CDSC will first be
applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to
all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. Subject to compliance with applicable regulations,
the Fund has reserved the right to pay the redemption or repurchase price of
shares of the Fund, either totally or partially, by a distribution in-kind of
securities (instead of cash) from the Fund's portfolio. The securities
distributed in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions, except in the case of
accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement.
See "Purchases -- General -- Minimum Investment." Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.
CLASS B DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class B shares pursuant to
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Distribution
Plan"), after having concluded that there is a reasonable likelihood that the
Distribution Plan would benefit the Fund and its Class B shareholders.
In certain circumstances, the fees described below have not yet been imposed
or are being waived. These circumstances are described below under the
heading "Current Level of Distribution and Service Fees."
SERVICE FEES. The Distribution Plan for Class B shares provides that the
Fund may pay MFD a service fee of up to 0.25% of the average daily net assets
attributable to the Class B shares annually in order that MFD may pay expenses
on behalf of the Fund relating to the servicing of shares of the Class B
shares. The service fee is used by MFD to compensate dealers which enter into
a sales agreement with MFD in consideration for all personal services and/or
account maintenance services rendered by the dealer with respect to Class B
shares owned by investors for whom such dealer is the dealer or holder of
record. MFD may from time to time reduce the amount of the service fees paid
for shares sold prior to a certain date. Service fees may be reduced for a
dealer that is the holder or dealer of record for an investor who owns shares
of the Fund having an aggregate net asset value at or above a certain dollar
level. Dealers may from time to time be required to meet certain criteria in
order to receive service fees. MFD or its affiliates are entitled to retain
all service fees payable under the Distribution Plan for Class B shares for
which there is no dealer of record or for which qualification standards have
not been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder
accounts.
DISTRIBUTION FEE. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Class B shares as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. While the amount of compensation received by MFD in
the form of distribution fees during any year may be more or less than the
expense incurred by MFD under its distribution agreement with the Fund, the
Fund is not liable to MFD for any losses MFD may incur in performing services
under its distribution agreement with the Fund.
OTHER FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to the Class B shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class B
distribution and service fees for its current fiscal year are equal to 0.90%
per annum. Except in the case of the 0.25% per annum Class B service fee paid
by the Fund upon the sale of Class B shares, payment of the Class B service
fee will be suspended until such date as the Trustees of the Trust may
determine.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a monthly basis. In determining the net
investment income available for distributions, the Fund may rely on
projections of its anticipated net investment income over a longer term,
rather than its actual net investment income for the period in order to
provide more stable periodic distributions. The Fund may make one or more
distributions during the calendar year to its shareholders from any long-term
capital gains and may also make one or more distributions during the calendar
year to its shareholders from short-term capital gains. Shareholders may elect
to receive dividends and capital gain distributions in either cash or
additional shares of the same class with respect to which a distribution is
made. (See "Tax Status" and "Shareholder Services -- Distribution Options"
below.) Distributions paid by the Fund with respect to Class A shares will
generally be greater than those paid with respect to Class B shares because
expenses attributable to Class B shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust
for federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), and to make distributions to its
shareholders in accordance with the timing requirements imposed by the Code.
It is expected that the Fund will not be required to pay any entity level
federal income or excise taxes.
Because the Fund intends to satisfy certain requirements of the Code, the Fund
expects to pay dividends to shareholders from interest on Municipal Bonds that
are generally exempt from federal income tax. One such requirement is that at
the close of each quarter of its taxable year, at least 50% of the value of
the Fund's total assets consists of obligations whose interest is exempt from
federal income tax. Distributions of income from capital gains, from
investments in taxable securities, and from certain other transactions
(including options and futures transactions) will be taxable to the
shareholders, whether the distribution is paid in cash or reinvested in
additional shares. Depending on the nature of the distribution and the
residence of the shareholder, certain Fund distributions may be subject to
state and local income taxes; shareholders should consult with their own tax
advisors in this regard.
Interest on indebtedness incurred by shareholders to purchase or carry shares
of the Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by certain private
activity bonds should consult their tax advisers before purchasing shares of
the Fund.
The interest on certain tax-exempt bonds and distributions by the Fund of such
interest may be a tax preference item for purposes of the individual and
corporate alternative minimum tax. All exempt-interest dividends may affect a
corporate shareholder's alternative minimum tax liability.
Shortly after the end of each calendar year, each shareholder will receive a
statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion exempted from federal income tax as "exempt-interest dividends,"
any portion that is a tax preference item for purposes of the alternative
minimum tax, any portion taxable as long-term capital gains, the portion, if
any, representing a return of capital (which is generally free of taxes, but
results in a basis reduction), and the amount, if any, of federal income tax
withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the Fund makes a distribution of
taxable income may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on any
taxable dividends and other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable
treaty. The Fund is also required in certain circumstances to apply backup
withholding at the rate of 31% on taxable dividends and certain redemption
proceeds paid to any shareholder (including a shareholder who is neither a
citizen nor a resident of the U.S.) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. However, backup withholding will not be applied to payments that
have been subject to 30% withholding. Prospective investors should read the
Fund's Account Application for additional information regarding backup
withholding of federal income tax and should consult their own tax advisers as
to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is
determined each day during which the Exchange is open for trading. This
determination is made once during each such day as of the close of regular
trading on the Exchange by deducting the amount of the liabilities
attributable to the class from the value of the Fund's assets attributable to
the class and dividing the difference by the number of shares of the class
outstanding. Assets in the Fund's portfolio are valued on the basis of their
market or other fair value, as described in the SAI. The net asset value of
each class of shares is effective for orders received in "good order" by the
dealer prior to its calculation and received by MFD prior to the close of
business on that day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has two classes of shares, entitled
Class A and Class B Shares of Beneficial Interest (without par value). The
Trust has reserved the right to create and issue additional classes and series
of shares, in which case each class of shares of a series would participate
equally in the earnings, dividends and assets attributable to that class of
that particular series. Shareholders are entitled to one vote for each share
held and shares of each series would be entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shares of all series would vote together in the election of Trustees and
ratification of selection of accountants. Additionally, each class of shares
of a series will vote separately on any material increases in the fees under
its Rule 12b-1 plan (in the case of Class B shares) or on any other matter
that affects solely that class of shares, but will otherwise vote together
with all other classes of shares of the series on all other matters. The Trust
does not intend to hold annual shareholder meetings. The Declaration of Trust
provides that a Trustee may be removed from office in certain instances (see
"Description of Shares, Voting Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth above in "Purchases -- Conversion of Class B Shares"). Shares of the
Fund are fully paid and non-assessable. Should the Fund be liquidated,
shareholders of each class would be entitled to share pro rata in the net
assets attributable to that class available for distribution to shareholders.
Shares will remain on deposit with the Shareholder Servicing Agent and
certificates will not be issued except in connection with pledges and
assignments and in certain other limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed (e.g., fidelity bonding and errors and omission
insurance) and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate,
tax-equivalent yield and total rate of return quotations for each class of
shares and may also quote fund rankings in the relevant fund category from
various sources, such as the Lipper Analytical Services, Inc. and Wiesenberger
Investment Companies Service. Any yield and tax-equivalent yield quotations
are based on the annualized net investment income per share allocated to each
class of the Fund over a 30-day period stated as a percent of the maximum
public offering price of that class on the last day of that period. Yield
calculations for Class B shares assume no CDSC is paid. The current
distribution rate for each class is generally based upon the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past twelve months and is computed by dividing the amount of such dividends by
the maximum public offering price of that class at the end of such period.
Current distribution rate calculations for Class B shares assume no CDSC is
paid. The current distribution rate differs from the yield calculation because
it may include distributions to shareholders from sources other than dividends
and interest, such as premium income from option writing, short-term capital
gains, and return of invested capital, and is calculated over a different
period of time. Total rate of return quotations reflect the average annual
percentage change over stated periods in the value of an investment in each
class of shares of the Fund made at the maximum public offering price of the
shares of that class with all distributions reinvested and which, if quoted
for periods of six years or less, will give effect to the imposition of the
CDSC assessed upon redemptions of the Fund's Class B shares. Such total rate
of return quotations may be accompanied by quotations which do not reflect the
reduction in value of the initial investment due to the sales charge or the
deduction of a CDSC, and which will thus be higher. All performance quotations
are based on historical performance and are not intended to indicate future
performance. Yield and tax-equivalent yield reflect only net portfolio income
allocable to a class as of a stated time and current distribution rate
reflects only the rate of distributions paid by the Fund over a stated period
of time while total rate of return reflects all components of investment
return over a stated period of time. The Fund's quotations may from time to
time be used in advertisements, shareholder reports or other communications to
shareholders. For a discussion of the manner in which the Fund will calculate
its yield, current distribution rate, tax-equivalent yield and total rate of
return, see the SAI. For further information about the Fund's performance for
the fiscal year ended January 31, 1996, please see the Fund's Annual Report. A
copy of the Annual Report may be obtained without charge by contacting the
Shareholder Servicing Agent (see back cover for address and phone number). In
addition to information provided in shareholder reports, the Fund may, in its
discretion, from time to time, make a list of all or a portion of its holdings
available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At
the end of each calendar year each shareholder will receive income tax
information regarding the tax status of all reportable dividends and
distributions for that year.
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) of dividends and capital gain
distributions will be made in additional full and fractional shares of the
same class of shares of the Fund at the net asset value in effect at the close
of business on the record date. Dividends and capital gains distributions in
amounts less than $10 will automatically be reinvested in additional shares of
the Fund. If a shareholder has elected to receive dividends and/or capital
gain distributions in cash, and the postal or other delivery service is unable
to deliver checks to the shareholder's address of record, or the shareholder
does not respond to mailings from the Shareholder Servicing Agent with regard
to uncashed distribution checks, such shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. Any request for an option change must be
received by the Shareholder Servicing Agent by the record date for a dividend
or distribution in order to be effective for that dividend or distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A
shares of the Fund alone or in combination with shares of any class of other
MFS Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-
month period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares of the Fund at the same reduced sales
charge as though the total quantity were invested in one lump sum, subject to
escrow agreements and the appointment of an attorney for redemptions from the
escrow amount if the intended purchases are not completed, by completing the
Letter of Intent section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund reaches a discount
level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of distributions of dividends and capital gains from
the same class of another MFS Fund. Furthermore, distributions made by the
Fund may be automatically invested at net asset value in shares of the same
class of any other MFS Fund, if shares of such Fund are available for sale
(without any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B shares in any year
pursuant to a SWP will not be subject to a CDSC and generally are limited to
10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or
investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for shares of the same class
of shares of the other MFS Funds under the Automatic Exchange Plan if such
shares are available for sale. The Automatic Exchange Plan provides for
automatic exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder if such fund is available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four different
funds. A shareholder should consider the objectives and policies of a fund and
review its prospectus before electing to exchange money into such fund through
the Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales
charge. For federal and (generally) state income tax purposes, an exchange is
treated as a sale of the shares exchanged and, therefore, could result in a
capital gain or loss to the shareholder making the exchange. See the SAI for
further information concerning the Automatic Exchange Plan. Investors should
consult their tax advisers for information regarding the potential capital
gain and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchase through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases.
------------------------
The SAI, dated June 1, 1996, contains more detailed information about the
Trust and the Fund including, but not limited to, information related to (i)
investment objective, policies and restrictions, (ii) the Trustees, officers
and investment adviser, (iii) portfolio transactions and brokerage
commissions, (iv) the method used to calculate yield, tax-equivalent yield and
total rate of return quotations of the Fund, (v) the Class B Distribution Plan
and (vi) various services and privileges provided by the Fund for the benefit
of its shareholders, including additional information with respect to the
exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares is waived
(Section II), and the CDSC for Class B shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B shares, as applicable, is
waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired
employees) and agents of MFS, Sun Life Assurance Company of Canada
("Sun Life") or any of their subsidiary companies;
* Trustees and retired trustees of any investment company for which
MFD serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other
financial institution ("dealers") which have a sales agreement with
MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
* Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of Plan participant;
* Loan from Plan (repayment of loans, however, will constitute new
sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section 1.401
(k)-1(d)(2), as amended from time to time);
* Termination of employment of Plan participant (excluding, however, a
partial or other termination of the Plan);
* Tax-free return of excess Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the Plan (e.g., participant account
fees), provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent; and
* Distributions from a Plan that has invested its assets in one or
more of the MFS Funds for more than 10 years from the later to occur
of: (i) January 1, 1993 or (ii) the date such Plan first invests
its assets in one or more of the MFS Funds. The sales charges will
be waived in the case of a redemption of all of the Plan's shares in
all MFS Funds (i.e., all the assets of the Plan invested in the MFS
Funds are withdrawn), unless immediately prior to the redemption,
the aggregate amount invested by the Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the Plan's assets in
the MFS Funds, in which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the contingent deferred sales charge imposed on certain
redemptions of Class A shares is waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party
administrators, or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old.
III. WAIVERS OF CLASS B SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the Plan
participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION ON SIMPLIFIED EMPLOYEE REDUCTION PLANS ("SAR-SEP
PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1996)
The table below shows the approximate taxable bond yields which are equivalent
to tax-exempt bond yields from 3% to 8% under federal income tax laws that
apply to 1996. (Such yields may differ under the laws applicable to subsequent
years.) Separate calculations, showing the applicable taxable income brackets,
are provided for investors who file joint returns and for those investors who
file individual returns.
<TABLE>
<CAPTION>
SINGLE RETURN JOINT RETURN INCOME TAX-EXEMPT YIELD
- ------------------------------------- TAX ---------------------------------------------
(TAXABLE INCOME)* BRACKET** 3% 4% 5% 6% 7% 8%
- ---------------------------------------------------------------------------------------------
EQUIVALENT TAXABLE YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 24,100 $ 0-$ 40,100 0.15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 24,000-$ 58,150 $ 40,100-$ 96,950 0.28 4.17 5.56 8.33 9.72 11.11
$ 58,150-$121,300 $ 96,900-$147,700 0.31 4.35 5.80 7.25 8.70 10.14 11.59
$121,300-$263,750 $147,700-$263,750 0.36 4.69 6.25 7.81 9.38 10.94 12.50
$263,750 & Over $263,750 & Over 0.396 4.97 6.62 8.28 9.93 11.59 13.25
- ----------------------------------------------------------------------------------------------
</TABLE>
*Net amount subject to Federal personal income tax after deductions and
exemptions.
**Effective federal tax bracket.
<PAGE>
APPENDIX C
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to loan to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities
to obtain funds to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port
or parking facilities, air or water pollution control facilities and certain
local facilities for water supply, gas, electricity or sewage or solid waste
disposal. Such obligations are included within the term Municipal Bonds if the
interest paid thereon qualifies as exempt from federal income taxes. Other
types of industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated
industrial or commercial facilities, may constitute Municipal Bonds, although
the current federal tax laws place substantial limitations on the size of such
issues.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its good faith, credit and taxing power for the payment of
principal and interest. The payment of such bonds may be dependent upon an
appropriation by the issuer's legislative body. The characteristics and
enforcement of general obligation bonds vary according to the law applicable
to the particular issuer. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source.
Industrial development bonds which are Municipal Bonds are in most cases
revenue bonds and do not generally constitute the pledge of the credit of the
issuer of such bonds. Municipal Bonds also include participations in municipal
leases. These are undivided interests in a portion of an obligation in the
form of a lease or installment purchase which is issued by state and local
governments to acquire equipment and facilities. Municipal leases frequently
have special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. Although the obligations will be
secured by the leased equipment or facilities, the disposition of the
underlying property in the event of non-appropriation or foreclosure might, in
some cases, prove difficult. In light of these concerns, the staff of the SEC
has advised investment companies to adopt and follow procedures for
determining whether municipal lease securities purchased are liquid and for
monitoring the liquidity of municipal lease securities held in such company's
portfolio. The Board of Trustees has adopted such procedures and has delegated
to the Adviser the authority to make determinations on the liquidity of
municipal lease securities in accordance with the procedures. The procedures
require that the Adviser use a number of factors in calculating the liquidity
of a municipal lease security, including, the frequency of trades and quotes
for the security, the number of dealers willing to purchase or sell the
security and the number of other potential purchasers, the willingness of
dealers to undertake to make a market in the security, the nature of the
marketplace in which the security trades, the credit quality of the security
and other factors which the Adviser may deem relevant. There are, of course,
variations in the security of Municipal Bonds, both within a particular
classification and between classifications, depending on numerous factors.
The yields on Municipal Bonds are dependent on a variety of factors,
including general money market conditions, supply and demand and general
conditions of the Municipal Bond market, size of a particular offering, the
maturity of the obligation and rating of the issue.
DESCRIPTION OF MUNICIPAL BOND RATINGS
The ratings of Moody's, S&P, Fitch and Duff & Phelps represent their
opinions as to the quality of various debt instruments.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating catgegory is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness
to pay interest and repay principal. The "B" rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied "BB" or
"BB-" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no interest is being
paid.
D: Bonds rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payment is
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeble
future developments, short-term debt of these issuers is generally rated
"F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in immiment default in payment of interest or principal.
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be indadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for potential downgrade, or "Evolving", where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated
"D-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business, and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
APPENDIX D
PORTFOLIO COMPOSITION CHART
MFS MUNICIPAL HIGH INCOME FUND
JANUARY 31, 1996
The table below shows the percentages of the Fund's assets at January 31,
1996 invested in bonds assigned to the various rating categories by S&P,
Moody's (provided only for securities not rated by S&P) and Fitch (provided
only for securities not rated by S&P or Moody's) and Duff & Phelps (provided
only for securities not rated by S&P, Moody's or Fitch) and in unrated
securities determined by MFS to be of comparable quality. For a split rated
issue, the S&P rating is used, and when an S&P rating is unavailable,
secondary sources are selected in the following order: Moody's, Fitch, and
Duff & Phelps.
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
------ ------- -------------- -----
AAA/Aaa 12.34% 0.66% 13.00%
AA/Aa 7.60% 0.30% 7.90%
A/A 3.83% 1.61% 5.44%
BBB/Baa 12.44% 7.62% 20.06%
BB/Ba 9.23% 27.54% 36.77%
B/B .67% 8.77% 9.44%
CCC/Caa 0.00% 6.41% 6.41%
CC/Ca 0.00% 0.00% 0.00%
C/C 0.00% 0.40% 0.40%
D 0.00% 0.58% 0.58%
-------
TOTAL 46.11 53.89% 100.00%
=======
The chart does not necessarily indicate what the composition of the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment
objective, policies and restrictions indicate the extent to which the Fund may
purchase securities in the various categories.
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281
Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[LOGO]
MFS(R) MUNICIPAL HIGH
INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
MMH-1-6/96/75M 25/225
MFS(R)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) MUNICIPAL HIGH
INCOME FUND
Prospectus
June 1, 1996
<PAGE>
MFS(R)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) MUNICIPAL STATEMENT OF
HIGH INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) June 1, 1996
- --------------------------------------------------------------------------------
Page
----
1. Definitions ................................................ 2
2. Investment Objective, Policies and Restrictions ............ 2
3. Management of the Fund ..................................... 9
Trustees ................................................ 9
Officers ................................................ 9
Investment Adviser ...................................... 10
Custodian ............................................... 10
Shareholder Servicing Agent ............................. 11
Distributor ............................................. 11
4. Portfolio Transactions and Brokerage Commissions ........... 12
5. Shareholder Services ....................................... 12
Investment and Withdrawal Programs ...................... 12
Exchange Privilege ...................................... 14
6. Tax Status ................................................. 14
7. Determination of Net Asset Value and Performance ........... 16
8. Class B Distribution Plan .................................. 18
9. Description of Shares, Voting Rights and Liabilities ....... 18
10. Independent Auditors and Financial Statements .............. 19
Appendix A ................................................. 20
MFS MUNICIPAL HIGH INCOME FUND
A Series of MFS Series Trust III
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI"), as amended or supplemented
from time to time, sets forth information which may be of interest to investors
but which is not necessarily included in the Fund's Prospectus, dated June 1,
1996. This SAI should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by contacting the Shareholder Servicing
Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS(R) Municipal High Income Fund,
a series of MFS Series Trust III
(the "Trust"), a Massachusetts
business trust. The Trust was
previously known as Massachusetts
Financial High Income Trust until
its name was changed on August 20,
1993. The Fund is the successor to
MFS High Yield Municipal Bond Fund
which was reorganized as a series
of the Trust on September 7, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated
June 1, 1996, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The investment objective of the Fund is to provide high
current income exempt from federal income taxes. Any investment involves risk
and there can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES. The Fund seeks to achieve its investment objective by
investing primarily (i.e., at least 80% of its assets under normal
circumstances) in debt securities issued by or on behalf of states, territories
and possessions of the United States, the District of Columbia, and their
political subdivisions, agencies or instrumentalities, the interest on which is
exempt from federal income tax ("Municipal Bonds" or "tax-exempt securities").
Under normal circumstances, the Fund will invest at least 65% of its total
assets in tax-exempt securities which offer a current yield above that generally
available on tax-exempt securities in the three highest rating categories of the
recognized rating agencies (commonly known as "junk bonds" if rated below the
four highest categories of recognized rating agencies). Such high risk
securities generally involve greater volatility of price and greater risk of
nonpayment of principal and interest (including the possibility of default by or
bankruptcy of the issuers of such securities) than securities in higher rating
categories. However, since available yields and yield differentials vary over
time, no specific level of income or yield differential can ever be assured.
Also, any income earned on portfolio securities would be reduced by the Fund's
expenses before it is distributed to shareholders.
The Fund may invest in a relatively high percentage of municipal bonds issued by
entities having similar characteristics. The issuers may be located in the same
geographic area, or may pay their interest obligations from revenue of similar
projects such as hospitals, electric utility systems, multi-family housing,
nursing homes, commercial facilities (including hotels), steel companies or life
care facilities. This may make the Fund more susceptible to similar economic,
political, or regulatory occurrences. As the similarity in issuers increases,
the potential for fluctuation of the net asset value of shares of the Fund also
increases.
The Fund reserves the right to invest more than 25% of its assets in industrial
revenue bonds such as industrial revenue bonds issued for electric utility
systems, multi-family housing, health care facilities, and steel companies.
Industrial revenue bonds are issued by various state and local agencies to
finance various projects. These investments might entail risks as described
below.
Electric utility systems face problems in financing large construction programs
in an inflationary period, cost increases and delay occasioned by environmental
considerations (particularly with respect to nuclear facilities), difficulty in
obtaining fuel at reasonable prices, the cost of competing fuel sources,
difficulty in obtaining sufficient rate increases and other regulatory problems,
the effect of energy conservation and difficulty of the capital market to absorb
utility debt.
The financing of multi-family housing projects is affected by a variety of
factors, including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of occupancy,
sound management of the developments, timely and adequate increases in rents to
cover increases in operating expenses, including taxes, utility rates and
maintenance costs, changes in applicable laws and governmental regulations and
social and economic trends.
Healthcare facilities include lifecare facilities, nursing homes and hospitals.
Lifecare facilities and nursing homes are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life style
and, if needed, the comprehensive care of nursing home services. Bonds to
finance lifecare facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to forecast inflationary cost pressures accurately weighs importantly
in this process. The facilities may also be impacted by regulatory cost
restrictions applied to health care delivery in general, particularly state
regulations or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing facilities in
the private or public sector. Hospital bond ratings are often based on
feasibility studies which contain projections of expenses, revenues and
occupancy levels. A hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management and medical
capabilities, economic developments in the service area, efforts by insurers and
government agencies to limit rates and expenses, confidence in the hospital,
service area economic developments, competition, availability and expense of
malpractice insurance, Medicaid and Medicare funding, and possible federal
legislation limiting the rates of increase of hospital charges.
The Fund may also invest in bonds for other commercial facilities (including
hotels) and industrial projects. Financing for such projects will be subject to
inflation and other general economic factors as well as construction risks
including labor problems, difficulties with construction sites and the ability
of contractors to meet specifications in a timely manner.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of the
bondholders creates additional risks associated with owning real estate,
including environmental risks.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into
repurchase agreements with sellers who are member firms (or a subsidiary
thereof) of the New York Stock Exchange (the "Exchange"), members of the Federal
Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are U.S. Government securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct claims against a borrower. In purchasing loans, the Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. Loans that are fully
secured offer the Fund more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loans acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to pay
additional cash on a certain date or on demand. These commitments may have the
effect of requiring the Fund to increase its investment in a company at a time
when the Fund might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Fund is committed to advance additional funds,
it will at all times hold and maintain in a segregated account cash or other
high grade debt obligations in an amount sufficient to meet such commitments.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loans and other direct investments
which the Fund will purchase, the Adviser will rely upon its (and not that of
the original lending institution's) own credit analysis of the borrower. As the
Fund may be required to rely upon another lending institution to collect and
pass on to the Fund amounts payable with respect to the loan and to enforce the
Fund's rights under the loan, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent the Fund from receiving such amounts.
In such cases, the Fund will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending institution
as an "issuer" of the loans for purposes of certain investment restrictions
pertaining to the diversification of the Fund's portfolio investments. The
highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans may involve additional risks to the Fund. For example, if a loan is
foreclosed, the Fund could become part owner of any collateral, and would bear
the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is conceivable that under emerging legal theories of
lender liability, the Fund could be held liable as a co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the Fund relies on the Adviser's research in an attempt to
avoid situations where fraud or misrepresentation could adversely affect the
Fund. In addition, loans and other direct investments may not be in the form of
securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, the Fund may be
unable to sell such investments at an opportune time or may have to resell them
at less than fair market value. To the extent that the Adviser determines that
any such investments are illiquid, the Fund will include them in the investment
limitations described below.
"WHEN-ISSUED" SECURITIES: The Fund may purchase securities on a "when-issued" or
on a "forward delivery" basis. When the Fund commits to purchase a security on a
"when-issued" or "forward delivery" basis, it will set up procedures consistent
with the General Statement of Policy of the Securities and Exchange Commission
(the "SEC") concerning such purchases. Since that policy currently recommends
that an amount of the Fund's assets equal to the amount of the purchase be held
aside or segregated to be used to pay for the commitment, the Fund will always
have cash, cash equivalents or high quality debt securities sufficient to cover
any commitments or to limit any potential risk. However, although the Fund does
not intend to make such purchases for speculative purposes and intends to adhere
to the provisions of the SEC policy, purchases of securities on such bases may
involve more risk than other types of purchases. For example, the Fund may have
to sell assets which have been set aside in order to meet redemptions. Also, if
the Fund determines it is necessary to sell the "when-issued" or "forward
delivery" securities before delivery, it may incur a loss because of market
fluctuations since the time the commitment to purchase such securities was made
and any gain or loss would not be tax-exempt.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so called "inverse
floating rate obligations" or "residual interest" bonds or certificates
structured to have similar features. In creating such an obligation, a
municipality issues a certain amount of debt and pays a fixed interest rate. A
portion of the debt is issued as variable rate short-term obligations, the
interest rate of which is reset at short intervals, typically ranging from
thirty-five days to one year. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based on the
difference between the entire amount of interest paid by the issuer on all of
the debt and the interest paid on the short-term obligation. Under usual
circumstances, the holder of the inverse floating rate obligation can generally
purchase an equal principal amount of the short-term obligation and link the two
obligations in order to create long-term fixed-rate bonds. Because the interest
rate on the inverse floating rate obligation is determined by subtracting the
short-term rate from a fixed amount, the interest rate will decrease as the
short-term rate increases and will increase as the short-term rate decreases.
The magnitude of increases and decreases in the market value of inverse floating
rate obligations may be approximately twice as large (or more if the inverse
instrument is issued in principal amount greater than the principal amount of
the short-term piece) as the comparable change in the market value of an equal
principal amount of long-term bonds which bear interest at the rate paid by the
issuer and have similar credit quality, redemption and maturity provisions.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, precious metals or other
commodities, or other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at maturity (i.e.,
principal value) or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed, and
may also be influenced by interest rate changes in the U.S. and abroad. At the
same time, indexed securities are subject to the credit risks associated with
the issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. government agencies.
OPTIONS: The Fund intends to write covered put and call options and purchase put
and call options on fixed income securities that are traded on U.S. securities
exchanges and over-the-counter. Call options written by the Fund give the holder
the right to buy the underlying securities from the Fund at a fixed exercise
price; put options written by the Fund give the holder the right to sell the
underlying securities to the Fund at a fixed exercise price. A call option
written by the Fund is "covered" if the Fund owns the underlying security
covered by the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash or securities in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains cash or short-term
money market instruments with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written
or is less than the exercise price of the put written if the difference is
maintained by the Fund in cash or short-term money market instruments in a
segregated account with its custodian. Put and call options written by the Fund
may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. The writer of an option
may have no control over when the underlying securities must be sold, in the
case of a call option, or purchased, in the case of a put option, since with
regard to certain options, the writer may be assigned an exercise notice at any
time prior to the expiration of the option.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or short-term money
market instruments. Such transactions permit the Fund to generate additional
premium income, which will partially offset declines in the value of portfolio
securities or increases in the cost of securities to be acquired. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the closing out of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options with the
result that the Fund would have to exercise options purchased in order to
realize any profit or maintain options written until exercise or expiration. If
the Fund is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by a national securities exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-write transactions (i.e.,
the Fund may purchase a security and then write a call option against that
security). The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at- the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments that call options are used in equivalent
buy-and-write transactions.
The Fund may write combinations of put and call options on the same security, a
practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event that
one of the options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Fund will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of a security remains
stable and neither the call nor the put is exercised. In an instance where one
of the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
The Fund may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
The Fund may also purchase warrants on fixed income securities. A warrant on a
fixed income security is a long-dated call option that provides the holder with
the right, but not the obligation, to purchase from an issuer a fixed income
security with a specified par value, coupon, and maturity at a fixed exercise
price on a specified date or between specified dates. Typically, the fixed
income securities that are deliverable pursuant to the warrant will be
noncallable securities. Warrants may be issued as entirely separate securities
or they may be attached to, but subsequently detachable from, a fixed income
security of the same issuer.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage (the "SEC illiquidity ceiling") of the Fund's assets. Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which the Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Fund for writing the option, plus the
amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of- the-money. The Fund will treat all or a
portion of the formula price as illiquid for purposes of the SEC illiquidity
ceiling imposed by the SEC staff. The Fund may also write over-the-counter
options with non-primary dealers and will treat the assets used to cover these
options as illiquid for purposes of such SEC illiquidity ceiling.
The Fund may purchase detachable call options on municipal securities, which are
options issued by an issuer of the underlying municipal securities giving the
purchaser the right to purchase the securities at a fixed price, up to a stated
time in the future or, in some cases, on a future date. The Fund may purchase
detachable call options either in connection with its purchase of the underlying
municipal securities or in separate transactions unrelated to purchases of the
underlying municipal securities. In general, however, the Fund will only
purchase detachable call options that are issued at the same time as the
underlying municipal securities. The Fund may or may not purchase the underlying
municipal securities. Because detachable call options may be long term
instruments, their value could be subject to greater volatility and, if the Fund
seeks to sell an option it has purchased, it could sustain a loss of all or a
portion of the amount paid to purchase the option. In this regard, detachable
call options have only recently been introduced and there is not yet an
established market for the sale of such instruments. In addition, depending on
changes in the value of the underlying municipal security, it may not be
profitable for the Fund to exercise an option it has purchased. In that event,
the Fund will lose the amount of the purchase price paid for the option.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or contracts based on municipal
bond or other financial indices, including any index of fixed income securities,
as such contracts become available for trading ("Futures Contracts"). A "sale"
of a Futures Contract means a contractual obligation to deliver the securities
called for by the contract at a specified price in a fixed delivery month or, in
the case of a Futures Contract on an index of securities, to make or receive a
cash settlement. A "purchase" of a Futures Contract means a contractual
obligation to acquire the securities called for by the contract at a specified
price in a fixed delivery month or, in the case of a Futures Contract on an
index of securities, to make or receive a cash settlement. Futures Contracts
have been designed by exchanges which have been designated as "contract markets"
by the Commodity Futures Trading Commission (the "CFTC"), and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market. Existing contract markets include the Chicago
Board of Trade and the International Monetary Market of the Chicago Mercantile
Exchange. Futures Contracts are traded on these markets, and, through their
clearing corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange.
At the same time a Futures Contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The initial deposit
varies but may be as low as 5% or less of the value of the contract. Daily
thereafter, the Futures Contract is valued and the payment of "variation margin"
may be required since each day the Fund would provide or receive cash that
reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities called for
by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a municipal bond
index Futures Contract, provides for a cash payment, equal to the amount, if
any, by which the value of the index at maturity is above or below the value of
the index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a broad
based index of securities designed to reflect movements in the relevant market
as a whole. The index assigns weighted values to the securities included in the
index, and its composition is changed periodically.
Although Futures Contracts call for the actual delivery of securities or, in the
case of Futures Contracts based on an index, the making or acceptance of a cash
settlement at a specified future time, the contractual obligation is usually
fulfilled before such date by buying or selling, as the case may be, on a
commodities exchange, an identical Futures Contract calling for settlement in
the same month, subject to the availability of a liquid secondary market. The
Fund incurs brokerage fees when it purchases and sells Futures Contracts.
The purpose of the purchase or sale of a Futures Contract entered into for
hedging purposes, in the case of a portfolio such as that of the Fund, which
holds or intends to acquire long-term fixed income securities, is to attempt to
protect the Fund from fluctuations in interest rates without actually buying or
selling long-term fixed income securities. For example, if the Fund owns
long-term bonds, and interest rates were expected to increase, the Fund might
enter into Futures Contracts for the sale of debt securities. Such a sale would
have much the same effect as selling an equivalent value of the long-term bonds
owned by the Fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Futures
Contracts would increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Fund could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase. However, the use of Futures Contracts as an investment technique
allows the Fund to maintain a hedging position without having to sell its
portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Fund could then buy long-term bonds on the
cash market. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of cash,
cash equivalents or short-term money market instruments from its portfolio in an
amount equal to the difference between the fluctuating market value of such
Futures Contracts and the aggregate value of the initial and variation margin
payments made by the Fund with respect to such Futures Contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the Adviser's investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell bonds from
its portfolio to meet daily variation margin requirements. Such sales of bonds
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so. The Fund may also enter into transactions in Futures
Contracts for non-hedging purposes, to the extent permitted by applicable law,
which involves greater risks.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on Futures
Contracts ("Options on Futures Contracts") for hedging purposes and for
non-hedging purposes, to the extent permitted by applicable law. An Option on a
Futures Contract provides the holder with the right to enter into a "long"
position in the underlying Futures Contract, in the case of a call option, or a
"short" position in the underlying Futures Contract, in the case of a put
option, at a fixed exercise price up to a stated expiration date or, in the case
of certain options, on such date. Such Options on Futures Contracts will be
traded on contract markets regulated by the CFTC. Depending on the pricing of
the option compared to either the price of the Futures Contract upon which it is
based or the price of the underlying debt securities, it may or may not be less
risky than ownership of the Futures Contract or underlying debt securities. As
with the purchase of Futures Contracts, when the Fund is not fully invested, it
may purchase a call Option on a Futures Contract to hedge against a market
advance due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the securities which are deliverable upon exercise
of the Futures Contract. If the futures price at expiration of the option is
below the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put Option on a
Futures Contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the Futures Contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives, less related transaction costs. Depending
on the degree of correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, the Fund's losses
from existing Options on Futures Contracts may to some extent be reduced or
increased by changes in the value of portfolio securities. The writer of an
Option on a Futures Contract is subject to the requirement of initial and
variation margin payments.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
security, or securities included in the index, underlying the Futures Contract,
or (c) through the holding of a call on the same Futures Contract and in the
same principal amount as the call written where the exercise price of the call
held (i) is equal to or less than the exercise price of the call written or (ii)
is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or securities in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
cash or securities in an amount equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or is less than the exercise price of the put written if the
difference is maintained by the Fund in cash or securities in a segregated
account with its custodian. Put and call Options on Futures Contracts written by
the Fund may also be covered in such other manner as may be in accordance with
the requirements of the exchange on which they are traded and applicable laws
and regulations.
The purchase of a put Option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. The Fund will
purchase a put Option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the option
and close out the underlying Futures Contract. In addition to the correlation
risks discussed above, the purchase of an option also entails the risk that
changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option purchased.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS: Various additional risks exist with respect to the trading of
options and futures. For example, the Fund's ability effectively to hedge all or
a portion of its portfolio through transactions in such instruments will depend
on the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant portion of the Fund's portfolio.
The trading of futures and options entails the additional risk of imperfect
correlation between movements in the futures or option price and the price of
the underlying index or obligation, while the trading of options also entails
the risk of imperfect correlation between securities used to cover options
written and the securities underlying such options. The anticipated spread
between the prices may be distorted because of various factors, which are set
forth under "Futures Contracts" above. The Fund may also enter into transactions
in such instruments for non-hedging purposes, which involves greater risks and
could result in losses which are not offset by gains on other portfolio assets.
The Fund's ability to engage in options and futures strategies will also depend
on the availability of liquid markets in such instruments. "Options" above sets
forth certain reasons why a liquid secondary market may not exist.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits" established by
exchanges which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit. In addition,
the exchanges on which futures and options are traded may impose limitations
governing the maximum number of positions on the same side of the market and
involving the same underlying instrument which may be held by a single investor,
whether acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written in one
or more accounts or through one or more brokers).
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no clearing house performance
guarantees. In addition, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost.
----------------
The investment objective and policies described above and the policies with
respect to portfolio management described below may be changed without
shareholder approval.
PORTFOLIO MANAGEMENT: Although in many cases the Fund will hold securities
(particularly, those which are unrated or which are in the medium and lower
rating categories) until maturity, the Fund intends to manage its portfolio by
buying and selling securities to the fullest extent practicable.
In managing its portfolio, the Fund seeks to take advantage of market
developments and yield disparities, which may include use of the following
strategies:
(1) shortening the average maturity of its portfolio in anticipation of a
rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying
another (e.g., general obligation bonds) when disparities arise in the
relative values of each; and
(4) changing from one debt security to an essentially similar debt security
when their respective yields are distorted due to market factors.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
shares of the Fund (which means the lesser of (i) more than 50% of its
outstanding shares of the Trust or a series or class, as applicable, or (ii) 67%
or more of the outstanding shares of the Trust or a series or class, as
applicable, present at a meeting at which holders of more than 50% of the
outstanding shares of the Trust or a series or class, as applicable, are
represented in person or by proxy):
The Fund may not:
(1) borrow money or pledge, mortgage or hypothecate in excess of 1/3 of its
assets, except as a temporary measure for extraordinary or emergency purposes
(the Fund intends to borrow money only from banks and only to accommodate
requests for the repurchase of shares of the Fund while effecting an orderly
liquidation of portfolio securities) (for the purpose of this restriction,
collateral arrangements with respect to options on fixed income securities,
Futures Contracts and Options on Futures Contracts and payments of initial and
variation margin in connection therewith are not considered a pledge of
assets);
(2) purchase any security or evidence of interest therein on margin, except
that the Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and except that the Fund may
make deposits on margin in connection with options on fixed income securities,
Futures Contracts and Options on Futures Contracts;
(3) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the writing, purchasing and selling of
puts, calls or combinations thereof with respect to securities and Futures
Contracts;
(4) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933, as
amended, in selling a portfolio security;
(5) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except Futures Contracts and Options on Futures Contracts) in the ordinary
course of the business of the Fund (the Fund reserves the freedom of action to
hold and to sell real estate acquired as a result of the ownership of
securities);
(6) purchase securities of any issuer if such purchase at the time thereof
would cause more than 10% of the voting securities of such issuer to be held
by the Fund;
(7) issue any senior security (as that term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act")), if such issuance is
specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder; and
(8) make loans to other persons except through the use of repurchase
agreements, the purchase of commercial paper or the purchase of all or a
portion of an issue of debt securities in accordance with its investment
objective, policies and restrictions, and provided that not more than 10% of
the Fund's assets will be invested in repurchase agreements maturing in more
than seven days.
As a matter of non-fundamental policy, the Fund may not knowingly invest in
securities (other than repurchase agreements), which are subject to legal or
contractual restrictions on resale unless the Board of Trustees has determined
that such securities are liquid based upon trading markets for the specific
security, if more than 15% of the Fund's net assets (taken at market value)
would be so invested.
For purposes of the investment restrictions described above and the state and
federal restrictions described below, the issuer of a tax-exempt security is
deemed to be the entity (public or private) ultimately responsible for the
payment of the principal of and interest on the security.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain state and
federal statutes, the Fund will not, as a matter of operating policy, (i) invest
more than 5% of its total assets at the time of investment in unsecured
obligations of issuers which, including predecessors, controlling persons,
general partners and guarantors, have a record of less than three years'
continuous business operation or relevant business experience, (ii) purchase or
retain in its portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or Trustee of
the Fund, or is a member, partner, officer or Director of the Adviser if, after
the purchase of the securities of such issuer by the Fund, one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or securities, or
both, (all taken at market value) of such issuer and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more than
5% of such shares or securities, or both, (all taken at market value), (iii)
sell any security which it does not own unless by virtue of its ownership of
other securities the Fund has at the time of sale a right to obtain securities,
without payment of further consideration, equivalent in kind and amount to the
securities sold and provided that if such right is conditional the sale is made
upon the same conditions, (iv) invest for the purpose of exercising control or
management, or (v) purchase securities issued by any registered investment
company except by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open market, is
part of a plan of merger or consolidation, provided, however, that the Fund
shall not purchase the securities of any registered investment company if such
purchase at the time thereof would cause more than 10% of the total assets of
the Fund (taken at market value) to be invested in the securities of such
issuers or would cause more than 3% of the outstanding voting securities of any
such issuer to be held by the Fund, and provided further, that the Fund shall
not purchase securities issued by any open-end investment company. These
policies are not fundamental and may be changed by the Fund without shareholder
approval in response to changes in the various state and federal requirements.
Except for investment restriction (1) above, these investment restrictions are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the management of the Fund's assets, and the
officers of the Trust are responsible for its operations. The Trustees and
officers of the Trust are listed below, together with their principal
occupations during the past five years (their titles may have varied during that
period).
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private investor; Massachusetts Financial Services Company, former Chairman
and Director (prior to September 30, 1991); Cambridge Bancorp, Director;
Cambridge Trust Company, Director
PETER G. HARWOOD
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (prior to December 1991); The Neiman Marcus Group,
Inc., Vice Chairman and Chief Financial Officer (prior to February 1992)
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT
Private investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH
Independent consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (Investment Adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
JOAN S. BATCHELDER,* Vice President
Massachusetts Financial Services Company, Senior Vice President
CYNTHIA M. BROWN,* Vice President
Massachusetts Financial Services Company, Senior Vice President
MATTHEW N. FONTAINE,* Vice President
Massachusetts Financial Services Company, Assistant Vice President
ROBERT J. MANNING,* Vice President
Massachusetts Financial Services Company, Senior Vice President
BERNARD SCOZZAFAVA,* Vice President
Massachusetts Financial Services Company, Vice President
JAMES T. SWANSON,* Vice President
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
- ----------
*"Interested persons" (as defined in the Investment Company Act of 1940 (the
"1940 Act")) of the Adviser, whose address is 500 Boylston Street, Boston,
Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor. Mr. Brodkin, the Chairman of MFD,
Messrs. Shames and Scott, Directors of MFD and Mr. Cavan, the Secretary of
MFD, hold similar positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $3,250 per year plus $165 per meeting and $130 per
committee meeting attended, together with such Trustees' out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 73 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 73 and receive reduced
payments if he has completed at least five years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period of time
in the event the Trustee is disabled or dies. These benefits will also be based
on the Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current year's service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
As of April 30, 1996, all Trustees and officers as a group owned less than 1% of
the outstanding shares of the Fund. As of April 30, 1996, Merrill Lynch, Pierce,
Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL was the record owner of
approximately 16.16% of the total outstanding Class A shares of the Fund, and
was the record owner of approximately 27.33% of the total outstanding Class B
shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined, pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Prospectus contains information with respect to the management of the
Adviser and other investment companies for which MFS serves as investment
adviser.
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement, dated September 1, 1993, as amended (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Subject to such policies as the
Trustees may determine, the Adviser makes investment decisions for the Fund. For
these services and facilities, under the Advisory Agreement, the Adviser
receives a management fee, computed and paid monthly, in an amount equal to the
sum of 0.30% of the first $1.3 billion of the Fund's average daily net asset
value and 0.25% of the amount in excess of $1.3 billion plus 4.75% of the Fund's
gross income (i.e., income other than gains from the sale of securities), in
each case on an annualized basis, for the Fund's then-current fiscal year.
For the Fund's fiscal years ended January 31, 1994, 1995 and 1996 management
fees amounted to $5,400,831, $6,385,098 and $6,996,766, respectively. In order
to comply with the expense limitations of certain state securities commissions,
the Adviser will reduce its management fee or otherwise reimburse the Fund for
any expense, exclusive of interest, taxes and brokerage commissions, incurred by
the Fund in any fiscal year to the extent such expenses exceed the most
restrictive of such state expense limitations. The Adviser will make appropriate
adjustments to such reimbursements in response to any amendment or rescission of
the various state requirements.
The Fund pays all of its expenses (other than those assumed by MFS or MFD),
including: Trustee fees discussed above, governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares; expenses of preparing, printing and mailing
share certificates, shareholder reports, notices, proxy statements to
shareholders and reports to governmental officers and commissions; brokerage and
other expenses connected with the execution, recording and settlement of
portfolio security transactions; insurance premiums; fees and expenses of State
Street Bank and Trust Company, the Fund's custodian, for all services to the
Fund, including safekeeping of funds and securities and maintaining required
books and accounts; expenses of calculating the net asset value of the Fund's
shares; and expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses for such purposes are borne by the Fund
except that the Fund's Distribution Agreement with MFD requires MFD to pay for
prospectuses that are to be used for sales purposes. Expenses of the Trust which
are not attributable to a specific series are allocated among the series in a
manner believed by management of the Trust to be fair and equitable. For a list
of the Fund's expenses, including the compensation paid to the Trustees who are
not officers of MFS, for the fiscal year ended January 31, 1996, see "Statement
of Operations" in the Fund's Annual Report to shareholders incorporated by
reference into this SAI.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the investments of the Fund, effecting the portfolio
transactions of the Fund and, in general, administering the affairs of the Fund.
The Advisory Agreement will remain in effect until August 1, 1996, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
shares of the Fund (as defined in "Investment Restrictions") and, in either
case, by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party. The Advisory Agreement
terminates automatically if assigned and may be terminated without penalty by
vote of a majority of the shares of the Fund (as defined in "Investment
Restrictions") or by either party to the Advisory Agreement on not more than 60
days' nor less than 30 days' written notice. The Advisory Agreement provides
that if MFS ceases to serve as the Adviser to the Fund, the Fund will change its
name so as to delete the initials "MFS". The Advisory Agreement further provides
that MFS may render services to others and may permit fund clients in addition
to the Fund to use the initials "MFS" in their names. The Advisory Agreement
also provides that neither the Adviser nor its personnel shall be liable for any
error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution and management of the
Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Advisory Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and trust
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities, including
repurchase agreements, issued by the Custodian and may deal with the Custodian
as principal in securities transactions. The Custodian also acts as the dividend
disbursing agent of the Fund. The Custodian has contracted with the Adviser to
perform certain accounting functions related to options transactions for which
the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective August 1, 1985, as amended (the
"Agency Agreement") with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions, and the keeping of records in connection with the
issuance, transfer and redemption of the shares of each class of the Fund. For
these services, the Shareholder Servicing Agent will receive a fee calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% of assets attributable to
Class A and Class B shares, respectively. In addition, the Shareholder Servicing
Agent will be reimbursed by the Fund for certain expenses incurred by the
Shareholder Servicing Agent on behalf of the Fund. State Street Bank and Trust
Company, the dividend and distribution disbursing agent of the Fund, has
contracted with the Shareholder Servicing Agent to administer and perform
certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated
January 1, 1995 (the "Distribution Agreement"), with the Trust. Prior to January
1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned subsidiary
of MFS, was the Fund's distributor. Where this SAI refers to MFD in relation to
the receipt or payment of money with respect to a period or periods prior to
January 1, 1995, such reference shall be deemed to include FSI, as the
predecessor in interest to MFD. Prior to that date, MFS served as the Fund's
principal underwriter pursuant to a distribution agreement, dated January 18,
1984, with the Fund's predecessor. Except for the periods from March 1, 1989 to
the close of business on March 23, 1989, February 6, 1990 to the close of
business on February 7, 1990, and on June 3, 1994 only shareholders of the Fund
have been permitted to purchase additional Fund shares since June, 1985. As of
the close of business on February 28, 1990, through November 4, 1990, shares of
the Fund were also not available for sale to existing shareholders (except
through the reinvestment of dividends and capital gains of the Fund).
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife, and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" below).
If shares of the Fund are made available for sale, Class A shares may be sold at
their net asset value to certain persons or in certain circumstances as
described in the Prospectus. Such sales are made without a sales charge to
promote good will with employees and others with whom MFS, MFD and/or the Fund
have business relationships, and because the sales effort, if any, involved in
making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4% and MFD retains approximately 3/4 of 1% of the public
offering price. In addition, MFD, on behalf of the Fund, pays a commission to
dealers who initiate and are responsible for purchases of $1 million or more as
described in the Prospectus.
CLASS B SHARES: MFD acts as agent in selling Class B shares of the Fund to
dealers. The public offering price of Class B shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay the placement of orders
to benefit themselves by a price change. On occasion, MFD may obtain brokers
loans from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
For the Fund's fiscal year ended January 31, 1996, gross sales charges on sales
of shares of the Fund amounted to $3,940,592, of which $670,957 was retained by
MFD and $3,269,635 by dealers, banks and certain other financial institutions.
The Fund received $145,062,665, representing the aggregate net asset value of
such shares. For the Fund's fiscal year ended January 31, 1995, gross sales
charges on sales of shares of the Fund amounted to $9,569,708, of which
$1,576,774 was retained by MFD and $7,992,934 by dealers, banks and certain
other financial institutions. The Fund received $288,599,775, representing the
aggregate net asset value of such shares. For the Fund's fiscal year ended
January 31, 1994, gross sales charges on sales of shares of the Fund amounted to
$4,318,254, of which $765,746 was retained by MFD and $3,552,508 by dealers,
banks and certain other financial institutions. The Fund received $144,059,470,
representing the aggregate net asset value of such shares.
For the Fund's fiscal years ended January 31, 1996 and 1995 and for the period
from September 7, 1993 through January 31, 1994, the CDSC imposed on redemption
of Class B shares was $196,890, $57,796 and $0, respectively.
The Distribution Agreement will remain in effect until August 1, 1996, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio committee consisting of employees of the Adviser who are appointed and
supervised by its senior officers. Changes in the investments of the Fund are
reviewed by its Board of Trustees. Members of the Fund's portfolio committee may
serve other clients of the Adviser or any subsidiary of the Adviser in a similar
capacity.
The primary consideration in portfolio security transactions for the Fund is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in which, and the broker-dealers through which, it seeks this
result. Municipal Bonds and other debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. The cost of securities purchased from underwriters
includes an underwriter's commission or concession, and the prices at which
securities are purchased and sold from and to dealers include a dealer's mark-up
or mark-down. The Adviser normally seeks to deal directly with the primary
market makers unless, in its opinion, better prices are available elsewhere.
Subject to the requirement of seeking execution at the most favorable price,
securities may, as authorized by the Advisory Agreement, be bought from or sold
to dealers who have furnished statistical, research and other information or
services to the Adviser or who have sold shares of funds for which MFS serves as
investment adviser. At present no arrangements to recapture commission payments
are in effect.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Fund's prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B of the Fund or any of the classes
of other MFS Funds or MFS Fixed Fund within a 13-month period (or 36- month
period, in the cases of purchases of $1 million or more), the shareholder may
obtain Class A shares of the Fund at the same reduced sales charge as though the
total quantity were invested in one lump sum by completing the Letter of Intent
section of the Fund's Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund at net asset value pursuant to
the Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable), the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all holdings of
all classes of shares of that shareholder in the MFS Funds or MFS Fixed Fund
reaches a discount level. See "Purchases" in the Prospectus for the sales
charges on quantity purchases. For example, if a shareholder owns shares valued
at $75,000 and purchases $25,000 of Class A shares of the Fund, the sales charge
for the $25,000 purchase would be at the rate of 4% (the rate applicable to
single transactions of $100,000). A shareholder must provide the Shareholder
Servicing Agent (or his investment dealer must provide MFD) with information to
verify that the quantity sales charge discount is applicable at the time the
investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of such fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and not subject to any CDSC.
Distributions will be invested at the close of business of the payable date for
distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other MFS fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments, based
upon the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100 except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of establishment of
the SWP. SWP payments are drawn from the proceeds of share redemptions (which
would be a return of principal and, if reflecting a gain, would be taxable).
Redemptions of Class B shares will be made in the following order: (i) to the
extent necessary, any "Free Amount"; (ii) any "Reinvested Shares"; (iii) to the
extent necessary, the "Direct Purchase" subject to the lowest CDSC (as such
terms are defined in "Contingent Deferred Sales Charge" in the Prospectus). The
CDSC will be waived in the case of redemptions of Class B shares pursuant to a
SWP, but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that redemptions for such periodic
withdrawals exceed dividend income reinvested in the account, such redemptions
will reduce and may eventually exhaust the number of shares in the shareholder's
account. All dividend and capital gain distributions for an account with a SWP
will be reinvested in full and fractional shares of the Fund at the net asset
value in effect as of the close of business on the record date for such
distributions. To initiate this service, shares generally having an aggregate
value of at least $5,000 either must be held on deposit by, or certificates for
such shares must be deposited with, the Shareholder Servicing Agent. With
respect to Class A shares, maintaining a withdrawal plan concurrently with an
investment program would be disadvantageous because of the sales charges
included in share purchases and the imposition of a CDSC on certain redemptions.
The shareholder may deposit into the account additional shares of the Fund,
change the payee or change the dollar amount of each payment. The Shareholder
Servicing Agent may charge the account for services rendered and expenses
incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume the cost
of these services. The Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another MFS
Fund. Any SWP may be terminated at any time by either the shareholder or the
Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all of its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar group; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds, if available for sale, under the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares of the Fund are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record).
Each Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change Request is
received before the close of business on the last business day of a month, the
Exchange Change Request will be effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the exchange privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where such
shares are acquired through direct purchase or reinvested dividends) who have
redeemed their shares have a one-time right to reinvest the redemption proceeds
in the same class of shares of any of the MFS Funds (if shares of the fund are
available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid; however, only shareholders who are
also shareholders of the Fund may reinvest their proceeds in the Fund (if
available for sale). In the case of proceeds reinvested in shares of MFS Money
Market Fund, MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund, the shareholder has the right to exchange the acquired shares for
shares of another MFS Fund at net asset value pursuant to the exchange privilege
described below. Such a reinvestment must be made within 90 days of the
redemption and is limited to the amount of the redemption proceeds. If the
shares credited for any CDSC paid are then redeemed within six years of the
initial purchase for Class B shares (or within 12 months of the initial purchase
of certain Class A shares), a CDSC will be imposed upon redemption. Although
redemptions and repurchases of shares are taxable events, a reinvestment within
a certain period of time in the same fund may be considered a "wash sale" and
may result in the inability to recognize currently all or a portion of any loss
realized on the original redemption for federal income tax purposes. Please see
your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at their net asset value. Exchanges will
be made only after instructions in writing or by telephone (an "Exchange
Request") are received for an established account by the Shareholder Servicing
Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper identification is given by the dealer or shareholder of record), and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k) record
keeping system made available by the Shareholder Servicing Agent) or all the
shares in the account. Each exchange involves the redemption of the shares of
the Fund to be exchanged and the purchase at net asset value (i.e., without a
sales charge) of shares of the same class of the other MFS Fund. Any gain or
loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return. No more than five exchanges may be made
in any one Exchange Request by telephone. If an Exchange Request is received by
the Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all the requirements
set forth above have been complied with at that time. However, payment of the
redemption proceeds by the Fund, and thus the purchase of shares of the other
MFS Fund, may be delayed for up to seven days if the Fund determines that such a
delay would be in the best interest of all its shareholders. Investment dealers
which have satisfied criteria established by MFD may also communicate a
shareholder's Exchange Request to MFD by facsimile subject to the requirements
set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds who are shareholders of the Fund (except holders of shares of MFS
Money Market Fund, MFS Government Market Fund, and Class A shares of the Cash
Reserve Fund acquired through direct purchase and dividends reinvested prior to
June 1, 1992) have the right to exchange their shares for Class A shares of the
Fund. subject to the conditions, if any, set forth in their respective
prospectuses. In addition, unitholders of the MFS Fixed Fund have the right to
exchange their units (except units acquired through direct purchases) for shares
of the Fund, subject to the conditions, if any, imposed upon such withholders by
the MFS Fixed Fund.
Any state income tax advantages for investment in state-specific shares of each
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
6. TAX STATUS
FEDERAL TAXES
The Fund has elected to be treated and intends to qualify each year as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), by meeting all applicable Code requirements,
including requirements as to the nature of the Fund's gross income, the amount
of Fund distributions (as a percentage of both the Fund's overall income and its
tax-exempt income), and the composition and holding period of the Fund's
portfolio assets. Because the Fund intends to distribute all of its net
investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes. If the
Fund should fail to qualify as a "regulated investment company" in any year, the
Fund would incur a regular corporate federal income tax upon its taxable income
and Fund distributions would generally be taxable as ordinary dividend income to
the shareholders.
That part of the Fund's distributions of net investment income which is
attributable to interest from tax-exempt securities will be designated by the
Fund as an "exempt-interest dividend" under the Code and will generally be
exempt from federal income tax in the hands of the shareholders so long as at
least 50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as shareholder tax preference items for purposes of the
alternative minimum tax, and all such distributions may increase a corporate
shareholder's alternative minimum tax. The percentage of income designated as
tax-exempt will be based on the ratio of the Fund's tax-exempt income to total
income for the entire fiscal year and is applied uniformly to all distributions
made during each fiscal year. This percentage, thus may differ from the actual
tax exempt percentage for any particular months's distribution. This tax-exempt
interest ratio is determined and reported to shareholders after the close of
each fiscal year. Shareholders are required to report exempt-interest dividends
on their federal income tax returns.
The Fund may realize capital gains and/or losses as the result of market
transactions (including options and futures transactions). Any distributions
from net realized short-term capital gains, and any distributions from net
investment income not designated as an exempt-interest dividend (such as income
from investments in taxable securities, including repurchase agreements, and
discount on bonds purchased at a market discount), whether paid in cash or
invested in additional shares, are taxable to shareholders as ordinary income.
Distributions from net capital gains (i.e., the excess of net long-term capital
gains over short-term capital losses), whether paid in cash or additional
shares, are taxable to shareholders as long-term capital gains for federal
income tax purposes without regard to the length of time the shareholders have
held their shares. Any Fund dividend that is declared in October, November, or
December of any calendar year that is payable to shareholders of record in such
a month, and that is paid the following January will be treated as if received
by the shareholders on December 31 of the year in which the dividend is
declared. The federal income tax status of all distributions will be reported to
shareholders annually.
Since all of the income of the Fund is expected to arise from interest and
capital gains, no part of the distributions to its shareholders will qualify for
the dividends-received deduction for corporations.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of any taxable
dividend or other taxable distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
In addition, shareholders disposing of shares after tax-exempt income has been
accrued but not yet declared as a dividend should be aware that a portion of the
sales proceeds realized upon disposition of the shares may reflect the existence
of such accrued tax-exempt income, and that such portion of the proceeds may be
subject to tax as a capital gain even though it would have been tax-exempt had
it been declared as a dividend prior to the disposition. Redemptions of shares
of the Fund can be effected with the least adverse tax consequences immediately
after the third business day of any month (the time at which the dividend
representing substantially all the income accrued for that month is declared).
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be disallowed to the extent of any exempt-interest dividends
received with respect to those shares and, if not disallowed, any such loss will
be treated as a long-term capital loss to the extent of any distributions of net
capital gain made with respect to those shares. Any loss realized upon a
disposition of shares may also be disallowed under rules relating to wash sales.
Gain may be increased (or loss reduced) upon a redemption of Class A shares of
the Fund within ninety days after their purchase followed by any purchase
(including purchases by exchange or by reinvestment) without payment of an
additional sales charge of Class A shares of the Fund or of another MFS Fund (or
any other shares of an MFS Fund generally sold subject to a sales charge).
Exempt-interest dividends are taken into account in calculating the amount of
social security and railroad retirement benefits that may be subject to federal
income tax.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry shares of the Fund will not be deductible for federal income
tax purposes. Further, persons who are "substantial users" (or persons related
thereto) of facilities financed by certain private activity bonds should consult
their own tax advisers before purchasing shares of the Fund. "Substantial user"
is defined generally as including a "non-exempt person" who regularly uses in a
trade or business a part of a facility financed from the proceeds of certain
private activity bonds.
The Fund's transactions in options and Futures Contracts will be subject to
special tax rules that may affect the amount, timing, and character of Fund
income and distributions to shareholders. For example, certain positions held by
the Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on such day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short-term capital
gain or loss. Certain positions held by the Fund that substantially diminish its
risk of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. The Fund will
limit its activities in options and Futures Contracts to the extent necessary to
meet the requirements of Subchapter M of the Code.
The Fund's current dividend and accounting policies may affect the amount,
timing, and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. The
Fund's investment in zero coupon securities and certain securities purchased at
a market discount will cause it to realize income prior to the receipt of cash
payments with respect to these securities. In order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting
in additional taxable gain or loss to the Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold tax at the rate of 30% on any such dividends and payments made to
Non-U.S. Persons that are subject to such withholding, regardless of whether a
lower treaty rate may be permitted. Any amounts overwithheld may be recovered by
such persons by filing a claim for refund with the U.S. Internal Revenue Service
within the time period applicable to such claims. Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdiction.
The Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a Non-U.S. Person) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. However, backup withholding will not be applied to payments which
have been subject to 30% withholding.
STATE AND LOCAL TAXES
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes. The
exemption of exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the tax laws of any state or local taxing
authority. Some states do exempt from tax that portion of an exempt- interest
dividend which represents interest received by a regulated investment company on
its holdings of Municipal Bonds of that state and its political subdivisions and
instrumentalities. Therefore, the Fund will report annually to its shareholders
the percentage of interest income earned by the Fund during the preceding year
from Municipal Bonds indicating, on a state-by-state basis only, the source of
such income. Each shareholder is advised to consult his own tax adviser
regarding the exemption of exempt-interest dividends under applicable state and
local law.
7. DETERMINATION OF NET ASSET VALUE AND
PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the day on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once during each
day as of the close of regular trading on the Exchange by deducting the amount
of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Debt securities (other than short-term obligations),
including listed issues, are valued on the basis of valuations furnished by
pricing service, which utilizes both dealer-supplied valuations and electronic
data processing techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices, since
such valuations are believed to reflect the fair value of such securities. Use
of the pricing services has been approved by the Board of Trustees. Positions in
listed options, Futures Contracts and Options on Futures Contracts will normally
be valued at the closing settlement price on the exchange on which they are
primarily traded. Short-term obligations with a remaining maturity in excess of
60 days will be valued based upon dealer supplied valuations. Other short-term
obligations are valued at amortized cost, unless the Board of Trustees
determines that this does not constitute fair value. Positions in
over-the-counter options will be valued using dealer supplied valuations.
Portfolio securities for which there are no such valuations are valued at fair
value as determined in good faith by or at the direction of the Board of
Trustees.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
offering price) to reach the value of that investment at the end of the periods.
The Fund may also calculate (i) a total rate of return, which is not reduced by
the CDSC (4% maximum for Class B shares) and therefore may result in a higher
rate of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the current maximum sales charge
(currently 4.75%), and/or (iii) total rates of return which represent aggregate
performance over a period or year-by-year performance, and which may or may not
reflect the effect of the maximum or other sales charge or CDSC. The Fund's
average annual total rate of return for Class A shares, reflecting the initial
investment at the maximum public offering price, for the one-year, five-year and
ten-year periods ended January 31, 1996 was, 8.50%, 7.13% and 6.85%,
respectively. The Fund's average annual total rate of return, not giving effect
to the sales charge on the initial investment, for the one-year, five-year and
ten-year periods ended January 31, 1996, was, 13.92%, 8.17% and 7.37%,
respectively. The Fund's average annual total rate of return for Class B shares
reflecting the CDSC for the one-year period ended January 31, 1996 and for the
period September 7, 1993 (the Fund's commencement of investment operations)
through the Fund's fiscal year ended January 31, 1996 was 8.78% and 3.88%,
respectively. The Fund's average annual total rate of return for Class B shares,
not giving effect to the CDSC for the one-year period ended January 31, 1996 and
for the period September 7, 1993 (the Fund's commencement of investment
operations) through the Fund's fiscal year ended January 31, 1996 was 12.78% and
5.02%, respectively.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000 in Class A shares, cover the period
from January 1, 1986 to December 31, 1995. It has been assumed that dividends
and capital gain distributions were reinvested in additional shares. These
performance results, as well as any yield, tax-equivalent yield or total rate of
return quotation provided by the Fund, should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate yields, tax-equivalent yields and total rates of
return should be considered when comparing the yield, tax- equivalent yield and
total rate of return of the Fund to yields, tax- equivalent yields and total
rates of return published for other investment companies or other investment
vehicles. Total rate of return reflects the performance of both principal and
income. Current net asset value of shares of the Fund as well as account balance
information may be obtained by calling 1- 800-MFS-TALK (637-8255).
MFS MUNICIPAL HIGH INCOME FUND -- A
VALUE OF
VALUE OF REINVESTED VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31 INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
----------- --------------- ------------- ---------- -----
1986 $9,617 $ 72 $ 1,008 $10,697
1987 8,936 100 1,827 10,863
1988 8,880 187 2,787 11,854
1989 8,983 252 3,884 13,119
1990 8,516 239 4,778 13,533
1991 8,647 242 6,059 14,948
1992 8,600 241 7,302 16,143
1993 8,750 245 8,717 17,712
1994 7,873 221 9,102 17,196
1985 8,507 238 11,235 19,980
EXPLANATORY NOTES: The results shown in the table assume that the initial
investment in the Fund was made on January 1, 1986. The results also assume that
the initial investment in the Fund was reduced by the current maximum sales
charge (4.75%). No adjustment has been made for any income taxes payable by
shareholders.
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class of the Fund over a
30-day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period by
the maximum offering price per share of that class of the Fund on the last day
of that period. The resulting figure is then annualized. Net investment income
per share of a class is determined by dividing (i) the dividends and interest
allocated to that class during the period, minus accrued expenses of that class
for the period, by (ii) the average number of shares of the class entitled to
receive dividends during the period multiplied by the maximum offering price per
share of such class on the last day of the period. The Fund's yield calculations
for Class A shares assume a maximum sales charge of 4.75%. The yield calculation
for Class B shares assumes no CDSC is paid. The Fund's yield for Class A shares
for the 30-day period ended January 31, 1996 was 6.74%. The yield for Class B
shares of the Fund for the 30-day period ended January 31, 1996 was 6.17%.
TAX-EQUIVALENT YIELD: The Fund's tax-equivalent yield for each class is
calculated by determining the rate of return that would have to be achieved on a
fully taxable investment to produce the after-tax equivalent of the yield for
that class. In calculating tax-equivalent yield, the Fund assumes certain
federal tax brackets for shareholders and does not take into account state
taxes. The Fund's tax-equivalent yield for Class A shares for the 30-day period
ended January 31, 1996 was 9.36% (assuming a tax bracket of 28%) and 9.77%
(assuming a tax bracket of 31%). The tax-equivalent yield for Class B shares of
the Fund for the 30-day period ended January 31, 1996 was 8.57% (assuming a tax
bracket of 28%) and 8.94% (assuming a tax bracket of 31%).
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B shares assumes no CDSC is paid. The current distribution rate for
Class A shares of the Fund for the twelve-month period ended on January 31, 1996
was 6.97%. The current distribution rate for Class B shares of the Fund for the
twelve-month period ended January 31, 1996 was 6.00%.
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts, and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. The Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund
to make full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund
to register under the Securities Act of 1933 ("Truth in
Securities Act" or "Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund
to allow shareholders to take capital gain distributions either
in additional shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal
bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as
America's first globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end
mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York
Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS World Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard
Trust, the first trust to invest in companies deemed to be
union-friendly by an advisory board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
8. CLASS B DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class B shares (the
"Distribution Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule") after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and its
shareholders. The Distribution Plan is designed to promote sales, thereby
increasing the net assets of the Fund attributable to Class B shares. Such an
increase may reduce the Fund's Class B expense ratio to the extent the Fund's
fixed costs are spread over a larger net asset base. Also, an increase in net
assets may lessen the adverse effects that could result were the Fund required
to liquidate portfolio securities to meet redemptions. There is, however, no
assurance that the net assets of the Fund will increase or that the other
benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption "Class B
Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: Except in the case of the first year service fee, no service fees
will be paid to any securities dealer who is the holder or dealer of record for
investors who own Class B shares having an aggregate net asset value of less
than $750,000, or such other amount as may be determined from time to time by
MFD (MFD, however, may waive this minimum amount requirement from time to time).
Dealers may from time to time be required to meet certain other criteria in
order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended January 31, 1996, the Fund paid the following Distribution
Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
DISTRIBUTION PLAN BY FUND BY MFD BY DEALERS
- ----------------- ------- ------------- -------------
Class B Distribution Plan $615,735 $615,735 $--0--
GENERAL: The Distribution Plan will remain in effect until August 1, 1996, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under the Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the Class B shares of the Fund (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in the
Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and one other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
two classes of shares of the Fund, Class A shares and Class B shares. The
Trust's other series also issues Class C shares. Each share of a class of the
Fund represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of each
class of the Fund are entitled to share pro rata in the net assets of the Fund
allocable to such class available for distribution to its shareholders. The
Trust reserves the right to create and issue additional classes or series of
shares, in which case the shares of each class or series would participate
equally in the earnings, dividends and assets allocable to that class of the
particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of section 16(c) of the 1940 Act. No material
amendment may be made to the Trust's Declaration of Trust without the
affirmative vote of a majority of the shares of the Trust or by an instrument in
writing without a meeting signed by a majority of Trustees and consented to by
more than 50% of the shares of the Fund. Shares have no pre-emptive or
conversion rights (except as described in "Purchases -- Conversion of Class B
Shares" in the Prospectus). Shares are fully paid and non-assessable. The Trust
may enter into a merger or consolidation, or sell all or substantially all of
its assets (or all or substantially all of the assets belonging to any series of
the Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated the Trust will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of the Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolio of Investments and Statement of Assets and Liabilities at January
31, 1996, the Statement of Operations for the year ended January 31, 1996, the
Statement of Changes in Net Assets for each of the two years in the period ended
January 31, 1996, the Notes to the Financial Statements and the Independent
Auditors' Report, each of which is included in the Annual Report to shareholders
of the Fund, are incorporated by reference into this SAI in reliance upon the
report of Ernst & Young LLP, independent auditors, given upon their authority as
experts in accounting and auditing. A copy of the Annual Report accompanies this
SAI.
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
TOTAL TRUSTEE
RETIREMENT BENEFIT ESTIMATED FEES
TRUSTEE FEES ACCRUED AS PART OF CREDIT YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $5,070 $ 917 8 $263,815
A. Keith Brodkin --0-- --0-- N/A --0--
Peter G. Harwood 5,795 523 5 111,366
J. Atwood Ives 5,265 963 17 101,356
Lawrence T. Perera 5,430 2,402 24 102,546
William Poorvu 5,795 2,507 24 111,366
Charles W. Schmidt 5,565 2,375 17 105,411
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
David B. Stone 6,025 1,511 11 115,521
Elaine R. Smith 5,565 950 27 105,411
</TABLE>
(1) For fiscal year ended January 31, 1996.
(2) Based on normal retirement age of 73.
(3) Information provided is provided for calendar year 1995. All Trustees
receiving compensation served as Trustees of 23 funds within the MFS fund
complex (having aggregate net assets at December 31, 1995, of approximately
$17.6 billion) except Mr. Bailey, who served as Trustee of 73 funds within
the MFS fund complex (havng aggregate net assets at December 31, 1995, of
approximately $31.7 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
----------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------
$4,738 $711 $1,185 $1,658 $2,369
5,116 767 1,279 1,791 2,558
5,494 824 1,374 1,923 2,747
5,872 881 1,468 2,055 2,936
6,250 937 1,562 2,187 3,125
6,627 994 1,657 2,320 3,314
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R)
MUNICIPAL HIGH
INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
MFS(R)
THE FIRST NAME IN MUTUAL FUNDS
MMH-13-6/96/500 25/225
<PAGE>
<PAGE>
[MFS Logo] ANNUAL REPORT FOR
The first name in Mutual Funds YEAR ENDED
JANUARY 31, 1996
MFS [Registration Mark] MUNICIPAL HIGH INCOME FUND
[Cover: A Photo of a Bridge]
<PAGE>
MFS [Registration Mark] MUNICIPAL HIGH INCOME FUND
TRUSTEES
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director, Massachusetts Financial Services
Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment advisers)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Cynthia M. Brown*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Steven E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
CUSTODIAN
State Street Bank and Trust Company
AUDITORS
Ernst & Young llp
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m. to
5 p.m. Eastern time (or leave a message anytime).
INVESTOR SERVICE
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For current account service, call toll free: 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576 any
business day from 9 a.m. to 5 p.m. Eastern time. (To use this service, your
phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone telephone.
TOP-RATED SERVICE
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The firm
achieved a 3.49 overall score - on a scale of 1 to 4 - in the 1995 survey. A
total of 71 firms responded, offering input on the quality of service they
receive from 36 mutual fund companies nationwide. The survey contained questions
about service quality in 17 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the fiscal year ended January 31, 1996, Class A shares of the Fund
provided a total return of +13.92%, while Class B shares had a total return of
+12.78% (including the reinvestment of distributions but excluding the effects
of any sales charges). These results underperformed the Lehman Brothers
Municipal Bond Index (the Lehman Index), which returned +15.05% over the same
period. It is important to note, however, that the Lehman Index represents an
unmanaged index of investment-grade municipal bonds rated Baa or higher, while
the Fund invests primarily in lower-quality municipal issues which are rated Baa
or below, or which are unrated. A discussion of the Fund's results relative to
the Lehman Index may be found in the Portfolio Performance and Strategy section
of this letter.
Economic Outlook
We believe the U.S. economy will continue to grow in 1996 although "subdued" may
be the best way to describe this growth. One factor holding growth in check is
the continued sluggishness of the consumer sector, an area that represents
approximately two-thirds of the economy. Going into this year, consumers have
been left in a somewhat weakened position, due in part to an increase in
consumer installment debt of some 30% over the past two years. A second reason
for the economy's weakness is the "lag effect" of increases in short-term
interest rates by the Federal Reserve Board in 1994 and into 1995. This lag
effect can last up to two years, although a series of reductions in short-term
rates by the Fed, which began late last year, could provide some support to the
economy through 1996. A third reason for weakness is the ongoing economic
doldrums in Europe and Japan, important markets for U.S. exports. Here again, we
are seeing a few signs, particularly in Japan, of modest recoveries that could
lead to improved prospects for U.S. exporters. Also, we believe lower interest
rates will give a boost to the U.S. housing market, an important segment of the
economy since it also affects such industries as major appliances, furniture,
and building-supply companies. Finally, although the first few weeks of 1996 saw
some signs of inflationary pressures, caused primarily by rising energy prices
and followed by an upward movement in gold, we believe inflation will remain
under control this year, due mainly to the subdued level of economic growth.
Interest Rates
Persistent signs of economic weakness led to decreases in short-term interest
rates by the Federal Reserve in late 1995 and early 1996 and, we believe, will
lead to some additional reductions as the year progresses. In the beginning of
the year, bond markets were trading in a narrow range as investors shifted
between concern about the lack of a budget resolution in Washington and hopes
that sluggish economic reports and low inflation might lead to lower interest
rates.
<PAGE>
LETTER TO SHAREHOLDERS - continued
Barring an unexpected shock, we believe that the still-cheap dollar, low
interest rates, and strong total employment will likely cushion the economy from
a sharp decline. Still, we believe that the subdued state of the economy makes
it unlikely that long-term interest rates will test the high end of 5.75% to
6.75%. However, in an environment of 2% to 3% inflation, this still leaves real
(adjusted for inflation) rates of return in the fixed-income markets at
relatively attractive levels.
Municipal Market
Although the municipal market provided impressive returns during 1995, it
significantly underperformed the taxable fixed-income market. For the calendar
period ended December 31, 1995, yields on long-term Treasury bonds declined
roughly 170 basis points (1.70%), while municipal yields for comparable
maturities declined by only 120 basis points (1.20%) (although principal value
and interest on Treasury securities are guaranteed by the U.S. government if
held to maturity). This difference can be attributed in large part to the threat
of tax reform and the effect it might have on the current tax-exempt market.
The impact of a change in the federal tax system on municipal bonds is
difficult to predict. One effect could be the total elimination of the federal
tax exemption on municipal bonds, which could cause yields on these bonds to
rise to levels which would be the same as, or higher than, those for comparable
nontaxable issues. Borrowing costs for state and local issuing authorities could
increase significantly. However, tax reform could also cause the overall level
of interest rates to decrease, which could help to reduce the impact of
potentially higher borrowing costs. Nevertheless, Congress is not likely to act
on any specific tax proposals until after the upcoming November election. Until
that time, the municipal market will remain under a cloud of uncertainty
regarding when, if, and how its fate will be determined particularly so if it
becomes a high-profile issue during the presidential campaign.
Additionally, future negotiations aimed at reducing the federal budget
deficit could impact municipal finances if federal aid to state and local
governments is reduced in an already slowing economy.
Portfolio Performance and Strategy
The Fund's underperformance relative to the Lehman Index can be attributed to
its high concentration of lower-rated bonds with high coupon rates relative to
the market. These securities generally are less price sensitive in a volatile
interest rate environment and provide less price fluctuation during these
periods. This portfolio structure is consistent with the Fund's investment
objective of providing a high level of current tax-exempt income through
generally lower-rated or unrated securities. Based on our outlook for interest
rates in 1996, we believe
2
<PAGE>
LETTER TO SHAREHOLDERS - continued
capital appreciation in the Fund over the coming year is likely to be minimal,
and interest income could make up a significant component of the Fund's total
return.
During the past year, the Fund's interest income stream came under pressure
due to the falling interest rate environment. Accordingly, the Fund was forced
to reduce the monthly distribution to $0.051 per share. Lower interest rates
have created the risk of bond calls from issues with double-digit coupons and
will continue to threaten the income stream.
Our efforts remain focused on research and preservation of high current
tax-exempt income. We continue to closely monitor our holdings and seek out new
opportunities for investment. Diversification of credit risk and of factors that
might affect liquidity remain important components of the Fund's overall
strategy.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[A Photo of A. Keith Brodkin] [A Photo of Cynthia M. Brown]
[Signature of A. Keith Brodkin] [Signature of Cynthia M. Brown]
A. Keith Brodkin Cynthia M. Brown
Chairman and President Portfolio Manager
February 14, 1996
PORTFOLIO MANAGER PROFILE
Cynthia Brown began her career at MFS in 1986 in the Fixed Income Department.
A graduate of Boston University, she was named Investment Officer in 1986,
Assistant Vice President in 1987, Vice President in 1989 and Senior Vice
President in 1994. In addition to managing MFS Municipal High Income Fund, she
oversees MFS [Registration Mark] Municipal Income Trust. Ms. Brown is a member
of the Boston Municipal Analysts Group.
3
<PAGE>
TAX FORM SUMMARY
In January 1996, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995. For
the year ended January 31, 1996, the distributions from investment income of
Class A and Class B shares were $0.68 and $0.59, respectively. For federal
income tax purposes, 99.6% of the total dividends paid by the Fund from net
investment income during the year ended January 31, 1996, is designated as an
exempt-interest dividend.
PERFORMANCE
The information below and on the following page illustrates the historical
performance of MFS Municipal High Income Fund Class A shares in comparison to
various market indicators. Fund results in the graph reflect the deduction of
the 4.75% maximum sales charge; benchmark comparisons are unmanaged and do not
reflect any fees or expenses. You cannot invest in an index. All results reflect
the reinvestment of all dividends and capital gains. Class B shares were offered
effective September 7, 1993. Information on Class B share performance appears
below.
Please note that the performance of other classes will be greater than or less
than the line shown, based on the difference in loads and fees paid by
shareholders investing in the different classes.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year Period Ended January 31, 1996)
[PLOT POINTS]
MFS Municipal High Lehman Brothers
Days Income Fund-A Municipal Bond Index CPI
- --------------------------------------------------------------------------------
2/1/91 0 9,525 10,000 10,000
- --------------------------------------------------------------------------------
1/31/92 365 10,513 11,091 10,260
- --------------------------------------------------------------------------------
1/31/93 730 11,462 12,181 10,594
- --------------------------------------------------------------------------------
1/31/94 1095 12,516 13,675 10,862
- --------------------------------------------------------------------------------
1/31/95 1460 12,386 13,188 11,166
- --------------------------------------------------------------------------------
1/31/96 1825 14,110 15,173 11,471
- --------------------------------------------------------------------------------
4
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended January 31, 1996)
[PLOT POINTS]
MFS Municipal High Lehman Brothers
Days Income Fund-A Municipal Bond Index CPI
- --------------------------------------------------------------------------------
2/1/86 0 9,525 10,000 10,000
- --------------------------------------------------------------------------------
1/31/87 365 10,481 11,607 10,143
- --------------------------------------------------------------------------------
1/31/88 730 10,677 11,845 10,554
- --------------------------------------------------------------------------------
1/31/89 1095 11,566 12,861 11,047
- --------------------------------------------------------------------------------
1/31/90 1460 12,518 13,894 11,621
- --------------------------------------------------------------------------------
1/31/91 1825 13,100 15,178 12,278
- --------------------------------------------------------------------------------
1/31/92 2189 14,455 16,834 12,597
- --------------------------------------------------------------------------------
1/31/93 2556 15,759 18,489 13,008
- --------------------------------------------------------------------------------
1/31/94 2921 17,208 20,755 13,336
- --------------------------------------------------------------------------------
1/31/95 3286 17,030 20,017 13,710
- --------------------------------------------------------------------------------
1/31/96 3651 19,400 23,030 14,084
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Municipal High Income Fund (Class A)
including 4.75% sales charge + 8.49% +5.46% +7.13% +6.85%
- ----------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class A)
at net asset value +13.92% +7.17% +8.17% +7.37%
- ----------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class B)
with CDSC+ + 8.78% -- -- +3.88%*
- ----------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class B)
without CDSC +12.78% -- -- +5.02%*
- ----------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index** +15.05% +7.60% +8.70% +8.70%
- ----------------------------------------------------------------------------------------------
Consumer Price Index[ss]** + 2.73% +2.69% +2.78% +3.48%
- ----------------------------------------------------------------------------------------------
<FN>
+ These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
* For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1996.
** Source: Lipper Analytical Services, Inc.
[ss] The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
All results are historical and are not an indication of future results. The
investment return and principal value of an investment in a mutual fund will
vary with changes in market conditions, and shares, when redeemed, may be worth
more or less than their original cost.
A portion of income may be subject to state, federal and/or alternative minimum
tax. Capital gains, if any, are subject to capital gains tax.
5
<PAGE>
PORTFOLIO OF INVESTMENTS - January 31, 1996
<TABLE>
<CAPTION>
Municipal Bonds - 98.8%
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Student Loan Revenue - 2.1%
Arizona Student Loan Acquisition Authority, 7.25s, 2010 $ 2,970 $ 3,149,626
Arizona Student Loan Acquisition Authority, 7.625s, 2010 4,610 5,104,008
Nebraska Higher Education Loan Rev., 6.45s, 2018 11,000 11,759,440
Pennsylvania Higher Education Assistance Agency,
Student Loan Rev., AMBAC, RIBS, 8.228s, 2022 2,700 2,747,223
------------
$ 22,760,297
- -------------------------------------------------------------------------------------------
General Obligation - 2.0%
City of Markham, Cook County, IL, 9s, 2012 $ 2,700 $ 2,933,955
Jefferson County, OH, 7.125s, 2019 8,660 9,331,756
New York City, NY, 6.875s, 2003 1,000 1,088,510
New York City, NY, 7.1s, 2011 1,000 1,078,590
New York City, NY, 7s, 2022 1,700 1,900,056
State of California, 0s, 2009 5,800 2,780,984
Virgin Islands Public Financing Authority, 7.25s, 2018 2,000 2,148,360
West Warwick, RI, 7.3s, 2008 200 214,492
West Warwick, RI, 7.45s, 2013 570 597,024
------------
$ 22,073,727
- -------------------------------------------------------------------------------------------
State and Local Appropriation - 1.1%
District of Columbia, Certificates of
Participation, 7.3s, 2013 $ 2,500 $ 2,569,275
San Bernardino, CA, Certificates of Participation
(Short Rites), MBIA, 8.66s, 2016 5,000 4,996,350
South Tucson, AZ, Municipal Property Corp., 8.75s, 2010 865 947,737
Troy, NY, Certificates of Participation,
Recreational Facilities Rev., 9.75s, 2010* +++ 2,730 273,000
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 1996 65 64,994
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 1997 70 70,078
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 1998 75 75,155
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 1999 80 80,235
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2000 85 85,261
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2001 95 95,397
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2002 115 115,600
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2003 130 130,805
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2004 150 151,063
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2005 165 166,308
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2010 235 230,547
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2011 250 245,110
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
State and Local Appropriation - continued
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2013 $ 290 $ 284,009
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2015 335 327,764
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2016 360 352,073
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2017 390 381,260
------------
11,642,021
- -------------------------------------------------------------------------------------------
Refunded and Special Obligation - 12.3%
Austin, TX, Combined Utilities System Rev., 10.75s, 2015 $ 1,780 $ 2,231,942
Daphne, AL, Special Care Facilities Financing Authority,
First Mortgage Rev., 0s, 2028 4,500 2,345,400
Daphne, AL, Special Care Facilities Financing Authority,
Second Mortgage Rev., 0s, 2028 89,975 46,894,970
Daphne, AL, Special Care Facilities Financing Authority,
Subordinated Note, 0s, 2018 48,475 7,082,682
Dayton, OH, Special Facilities Rev. (Emery Air Freight),
"A," 12.5s, 2009 950 1,124,990
Hopewell County, VA, Hospital Authority
(John Randolph Hospital), 8.85s, 2013 950 1,010,344
Maine Health & Higher Education Facilities Authority
(St. Mary's General Hospital), 8.625s, 2022 5,140 5,961,475
Mesa County, CO, Residual Rev., 0s, 2012 25,125 7,795,283
Mississippi Hospital Equipment & Facilities Authority
Rev. (Rush Medical Center), 8.75s, 2016 2,800 3,095,904
New Lenox, IL, Community Park Development Authority,
8.25s, 2014 4,205 5,313,690
New York Local Government Assistance Corp., 7s, 2021 800 921,768
Southern California Public Power Authority
(Transmission Project), 0s, 2015 10,000 3,443,900
South Carolina Public Service Authority, 7.1s, 2021 2,000 2,314,980
Spirit Lake, IA, Industrial Development Rev.
(Crystal Tips, Inc.), 0s, 2016 3,612 5,109,709
Telluride Gondola Transit Co. (Colorado Real Estate Transfer
Assessment Rev.), 11.5s, 2012 2,345 3,855,719
Texas Turnpike Authority (Houston Ship Channel Bridge),
12.625s, 2020 21,090 30,048,399
Washington Public Power Supply System,
Project #1, 14.375s, 2001 1,000 1,304,200
Washington Public Power Supply System,
Project #1, 15s, 2017 1,830 1,968,311
Washington Public Power Supply System,
Project #3, 15s, 2018 1,350 1,452,033
------------
$133,275,699
- -------------------------------------------------------------------------------------------
Single Family Housing Revenue - 8.1%
Alaska Housing Finance Corp., 6.5s, 2034 $ 1,645 $ 1,691,455
Arkansas Housing Development Agency Residential Mortgage
Rev., 0s, 2015 12,500 1,536,250
Berkeley, Brookes, & Fayette Counties, WV, 0s, 2016 22,285 2,452,464
California Housing Finance Agency Rev., 7.4s, 2026 16,300 17,662,028
Chicago, IL, Single Family Mortgage, 0s, 2017 16,190 1,542,583
</TABLE>
7
<PAGE>
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Single Family Housing Revenue - continued
Colorado Housing Finance Authority, 8s, 2016 $ 3,000 $ 3,073,470
Cook County, IL, Single Family Housing, 0s, 2015 5,130 618,985
Corpus Christi, TX, Housing Finance Corp., 0s, 2011 3,395 770,699
Delaware Housing Authority Rev
(Single Family Mortgage), 6.75s, 2024 2,770 2,902,240
East Baton Rouge, LA, 0s, 2010 22,095 4,586,922
El Paso, TX, Housing Finance Corp., 8.75s, 2011 975 1,062,194
Florida Housing Finance Agency, 0s, 2012 755 143,940
Florida Housing Finance Agency, 0s, 2016 10,800 1,427,328
Harris County, TX, Housing Finance Corp., 9.875s, 2014 860 860,808
Jefferson County, CO, 8.875s, 2013 495 535,377
Maine Housing Authority, Mortgage Purchase, 8.2s, 2019 1,820 1,889,943
Maine Housing Authority, Mortgage Purchase, 6.35s, 2022 75 76,704
Maine Housing Authority, Mortgage Purchase, 8.2s, 2022 5,980 6,209,811
Mississippi Home Corp., 9.25s, 2012 290 315,978
Nebraska Investment Finance Authority, 0s, 2016 3,040 285,000
Nevada Housing Division, 0s, 2015 4,808 699,519
New Castle County, DE, 0s, 2016 1,870 232,011
New Hampshire Housing Finance Authority, 0s, 2011 1,240 247,802
New Hampshire Housing Finance Authority, 8.5s, 2014 4,005 4,226,316
New Mexico Mortgage Finance Authority, 12s, 2011 40 40,505
New Mexico Mortgage Finance Authority, 6.9s, 2024 3,400 3,568,028
North Dakota Housing Finance Agency, 8.3s, 2012 475 497,966
North Dakota Housing Finance Agency, 6.8s, 2023 955 998,242
Ohio Housing Finance Agency, GNMA, RIBS, Single Family
Mortgage Rev., 9.324s, 2031 1,750 1,884,313
Reno County, KS, Mortgage Rev., 0s, 2014 8,650 1,073,292
State of Texas, 7s, 2025 1,400 1,511,244
Tennessee Housing Development Agency,
Home Ownership Program, 8.125s, 2021 2,080 2,091,378
Texas Housing Agency, 8.2s, 2016 975 1,007,360
Texas Housing Agency, Residential Mortgage Rev.,
8.4s, 2020 1,960 2,074,503
Utah Housing Finance Agency, 0s, 2016 17,690 2,217,443
Vermont Housing Finance Agency, Home Mortgage Purchase, "B",
8.1s, 2022 1,735 1,825,845
Virginia Housing & Development Authority, 7.125s, 2022 9,505 10,263,974
Wisconsin Housing & Economic Development Authority,
Home Ownership Rev., 0s, 2016 2,535 335,634
Wisconsin Housing & Economic Development Authority,
Home Ownership Rev., RIBS, 9.755s, 2022 2,650 2,976,215
------------
$ 87,415,769
- -------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 2.3%
Alexandria, VA, Redevelopment & Housing Authority
(Jefferson Village Apartments), 9s, 2018 $ 2,000 $ 2,080,740
Broward County, FL, Housing Finance Authority
(Deerfield Beach Apartments), 13s, 2000 3,398 2,055,907
Dallas, TX, Housing Finance Corp., 8.5s, 2011 3,350 3,489,092
Escondido, CA, Community Development Authority
(Las Villas del Norte), 8.875s, 2005 1,660 1,664,100
</TABLE>
8
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Multi-Family Housing Revenue - continued
Fairfax County, VA, Redevelopment & Housing Authority
(Little River Glen), 8.95s, 2020 $ 2,040 $ 2,122,028
Florida Housing Finance Agency (South Lake Apartments),
8.7s, 2021 3,500 3,581,655
Maplewood Terrace, RI, Housing Development Corp.,
6.9s, 2025 4,030 4,214,010
Massachusetts Housing Finance Agency, 8.5s, 2020 15 15,490
Memphis, TN, Health, Education & Housing Facilities Board
(Wesley Highland Terrace), 12.75s, 2015* 6,300 5,355,000
------------
$ 24,578,022
- -------------------------------------------------------------------------------------------
Guaranteed Housing Revenue - 7.3%
Maryland Energy Financing Administration
(Solid Waste), 9s, 2016 $ 28,300 $ 28,582,434
Massachusetts Industrial Finance Agency
(Solid Waste Disposal Rev.), 12s, 2016 3,600 3,607,848
Pennsylvania Economic Development Financing
Authority, Recycling Rev.
(Ponderosa Fibres Project), 9.25s, 2022 25,000 26,304,250
Port Walla Walla, WA, Solid Waste Recycling Rev.
(Ponderosa Fibres Project), 9.125s, 2026 20,000 21,164,600
------------
$ 79,659,132
- -------------------------------------------------------------------------------------------
Health Care Revenue - 16.8%
Arkansas Development Finance Authority, Economic
Development Rev. (Southwest Homes), 10.8s, 2018 $ 965 $ 1,021,539
Bell County, TX, Health Facilities Authority
(Kings Daughters Hospital), 9.25s, 2008 1,255 1,395,196
Berlin, MD, Hospital Rev. (Atlantic General
Hospital), 8.375s, 2022 1,375 1,469,820
Brentwood, TN, Industrial Development Board,
8.5s, 1995* 50 25,000
Brentwood, TN, Industrial Development Board, 9s, 1997* 15 7,500
Brentwood, TN, Industrial Development Board, 10s, 2001* 1,650 825,000
Brevard County, FL, Health Facilities Authority
(Beverly Enterprises), 10s, 2010 1,350 1,517,157
Cambria County, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2012 1,200 1,507,404
Chester County, PA, Industrial Development Authority
(RHA/PA Nursing Home, Inc.), 10.125s, 2019 1,980 2,062,586
Clermont County, OH, Hospital Facilities Rev.
(Mercy Health Systems), AMBAC, MURIC, 9.221s, 2021 1,300 1,578,759
Colorado Health Facilities Authority Rev.
(Gericare, Inc./Denver), 10.5s, 2019* 5,000 3,443,750
Connecticut Development Authority
(Waterbury Health), 13.5s, 2014 2,765 2,816,926
Connecticut Health & Educational Facilities
(Johnson Evergreen Corp.), 8.5s, 2014 1,350 1,448,834
Daphne, AL, Special Care Facilities Financing Authority
(Westminster Village), 8.25s, 2026+++ 12,500 7,500,000
Desert Hospital District, CA, Hospital Rev.
(Desert Hospital), 8.354s, 2020 4,000 4,387,800
District of Columbia, Hospital Rev.
(Hospital for Sick Children), 8.875s, 2021 970 1,051,936
District of Columbia, Hospital Rev.
(Washington Hospital), 7.125s, 2019 1,750 1,788,728
</TABLE>
9
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Health Care Revenue - continued
Doylestown, PA, Hospital Authority
(Doylestown Hospital), 7.2s, 2023 $ 2,200 $ 2,222,726
Fairfax, Fauquier & Loudoun Counties, VA, Health
Center Commission, Nursing Home Rev., 9s, 2020 1,910 2,018,927
Fulton County, GA, Residential Care Facilities,
Elderly Authority Rev. (Lenbrook Square
Foundation), 9.75s, 2017 3,530 3,610,802
Grand Junction, CO, Hospital Rev.
(Lincoln Park Osteopathic Hospital), 6.9s, 2019 2,900 2,756,334
Hannibal, MO, Industrial Development Authority
(Hannibal Regional Health Care), 9.5s, 2022+ 3,000 3,522,840
Hobbs, NM, Health Facilities Rev.
(Nemecal Associates), 9.625s, 2014 1,760 1,874,206
Illinois Health Facilities Rev. (Memorial Hospital),
7.25s, 2022 1,500 1,560,135
Jacksonville, FL, Health Facilities Authority
(National Benevolent), 7s, 2022 1,000 1,040,760
Jacksonville, FL, Industrial Development Rev.
(Beverly Enterprises), 9.75s, 2011 980 1,089,976
Jefferson County, KY, Health Facilities Rev.
(Beverly Enterprises), 10.125s, 2008 2,295 2,540,129
Jefferson County, TX, Health Facilities Rev., 0s, 2015 5,810 710,447
Kansas City, MO, Industrial Development Authority,
Retirement Facilities, 9s, 2013 5,450 5,928,183
Lee County, FL, Industrial Development Authority
(Beverly Enterprises), 10s, 2010 930 1,053,885
Lexington-Fayette Counties, KY, Health Care Facilities
Rev. (Sayre Christian Village), 10s, 2012 960 988,445
Louisiana Public Facilities Authority
(Southwest Medical Center), 11s, 2006 1,515 701,874
Luzerne County, PA, Industrial Development Authority
(Beverly Enterprises), 10.125s, 2008 1,325 1,480,303
Martin County, FL, Industrial Development Authority
(Beverly Enterprises), 9.8s, 2010 2,850 3,179,061
Massachusetts Health & Education Facilities Authority
(Fairview Extended Care Facility), 10.25s, 2021 3,000 3,438,660
Massachusetts Health and Educational Facilities
Authority Rev., 9.375s, 2014 5,000 5,058,050
Massachusetts Industrial Finance Agency, 8.875s, 2025 7,845 8,160,683
Massachusetts Industrial Finance Agency (Martha's
Vineyard Long-Term Care), 9.25s, 2022 3,410 3,239,500
Meridian, MI, Economic Development Corp.
(Burcham Hills), 9.625s, 2019 2,390 2,553,715
Michigan Strategic Fund Ltd. Obligation Rev.
(River Valley Recovery Center), 12.875s, 2015 1,032 1,209,062
Montgomery County, OH, Hospital Rev. (Kettering
Convalescent Center), 10s, 2020 5,200 5,408,572
Montgomery County, PA, Higher Education & Health
Authority Rev. (AHF/Montgomery), 10.5s, 2020 2,500 2,652,575
</TABLE>
10
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Health Care Revenue - continued
Nebraska Investment Finance Authority
(Centennial Park), 10.5s, 2016 $ 2,200 $ 2,292,994
New Hampshire Industrial Development Authority
(Tall Pines), 11.25s, 2016 2,400 2,669,184
New Jersey Economic Development Authority
(Burnt Tavern Convalescent Center), 9s, 2013 1,700 1,801,507
New Jersey Economic Development Authority
(Courthouse Convalescent Center), 8.7s, 2014 1,350 1,418,823
New Jersey Economic Development Authority
(Geriatric & Medical Services), 9.625s, 2004 510 576,657
New Jersey Economic Development Authority
(Geriatric & Medical Services), 9.625s, 2022 1,350 1,507,005
New Jersey Economic Development Authority
(Gerimed Care Inn), 10.5s, 2020 3,000 3,276,900
New Jersey Economic Development Authority
(Greenwood Health Care), 9.75s, 2011 3,125 3,229,375
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.5s, 2009 700 718,319
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.6s, 2011 1,000 1,026,050
North Carolina Medical Care Commission, Hospital Rev.
(Valdese General Hospital), 8.75s, 2016 1,940 2,108,916
North Central Texas, Health Facilities Development Corp.
(Baylor University Medical Center), INFLO, 9.66s, 2016 4,300 5,404,412
North Central Texas, Health Facilities Development Corp.,
MBIA (Presbyterian Health Care System), 9.72s, 2021 4,000 4,485,680
Okaloosa County, FL, Retirement Rental Housing Rev.
(Beverly Enterprises), 10.75s, 2003 2,885 3,131,350
Osceola County, FL, Industrial Development Rev.
(Community Provider), 7.75s, 2017 2,700 2,840,292
Owensboro, KY (Children's Regional Hospital), 13s, 2010 3,400 3,461,166
Portsmouth, VA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 2,085 2,381,654
Prince William County, VA, Industrial Development
Authority, Residential Care (Westminster
at Lake Ridge), 10s, 2022 3,500 3,814,405
Rochester, MN, Health Care Facilities Rev.
(Mayo Medical Foundation), FIRS, 7.93s, 2021 2,000 2,122,200
Salt Lake City, UT, Hospital Rev. (Intermountain
Health Care), 9.16s, 2020 1,250 1,441,975
Santa Fe, NM, Industrial Development Rev.
(Casa Real Nursing Home), 9.75s, 2013 1,890 2,023,547
Seminole County, FL, Industrial Development Authority
(Friendly Village of Florida), 10s, 2011 880 916,027
St. Charles County, MO, Industrial Development
Authority (Garden View Care Center), 10s, 2016 1,770 1,821,153
St. Petersburg, FL, Health Facilities Rev.
(Swanholm Nursing), 10s, 2022 1,580 1,725,960
</TABLE>
11
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Health Care Revenue - continued
State of Montana Health Facilities Authority,
AMBAC, 9.32s, 2016 $ 4,000 $ 4,528,720
Suffolk County, NY, Industrial Development Agency
(A Planned Program for Life Enrichment),
9.75s, 2015 3,765 3,200,250
Tyler, TX, Health Facilities Development Corp.
(Park Place), 12.5s, 2018++ 4,865 4,851,816
Vincennes, IN, Economic Development Authority
(Lodge of the Wabash), 12.5s, 2015 1,110 1,087,800
Waterford Township, MI, Economic Development Rev
(Canterbury Health Care), 8.375s, 2023 3,100 3,261,882
Westerville, OH, Industrial Development Rev
(Health Care Corp.), 10s, 2008 535 548,075
Westside Habilitation Center, Cheneyville, LA,
8.375s, 2013 6,000 6,038,880
Wilkins Area, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 1,150 1,315,405
------------
$182,876,164
- -------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 7.8%
Claiborne County, MS, Pollution Control Rev.
(Middle South Energy, Inc.), 9.5s, 2016 $ 2,350 $ 2,437,538
Clark County, NV (Nevada Power), FGIC, 6.7s, 2022 4,000 4,278,120
Georgia Municipal Electric Authority, Power Rev.,
8.426s, 2022 9,900 10,801,692
Illinois Development Finance Authority, Solid Waste
Disposal Rev., (Ford Heights Waste Tire Project),
7.875s, 2011 7,975 7,598,421
Intermountain Power Agency, UT, Power Supply
Rev., 0s, 2017 5,000 1,458,100
Lake Charles, LA, Port Facilities Rev.
(Truckline LNG), 7.75s, 2022 3,500 3,969,035
Midland Michigan Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration),
9.5s, 2009 3,000 3,320,190
Montana Board of Investment Resources Recovery Rev
(Yellowstone Energy), 7s, 2019 4,595 4,535,770
New Jersey Economic Development Authority
(Vineland Cogeneration), 7.875s, 2019 3,000 3,243,180
New York State Energy Research and Development
Authority, Electric Facilities Rev., 7.15s, 2019 1,650 1,713,756
New York Energy Research and Development Authority,
Electric Facilities Rev., AMBAC, 7.5s, 2026 4,750 5,233,835
Palm Beach County, FL, Solid Waste Development,
6.95s, 2022 6,650 6,890,331
Pennsylvania Economic Development Financing Authority,
Resources Recovery Rev., 6.6s, 2019 10,000 10,017,400
Pittsylvania County, VA, Industrial Development
Authority, 7.55s, 2019 10,000 10,761,000
Southern California Public Power Authority,
Transportation Project, RIBS, 7.812s, 2012 1,350 1,465,884
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 9s, 2015 2,500 2,840,925
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 8s, 2024 4,000 4,335,800
------------
$ 84,900,977
- -------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Turnpike Revenue - 8.4%
Arapahoe County, CO, Capital Improvement
(Highway Rev.), 0s, 2015 $ 26,355 $ 6,874,438
Arapahoe County, CO, Capital Improvement
(Highway Rev.), 0s, 2026 65,000 7,195,500
Florida Mid-Bay Bridge Authority Rev., "B", 8.5s, 2022 2,500 2,878,925
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2012 8,000 4,749,680
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2013 5,000 2,989,800
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2018 44,190 10,828,318
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2021 25,000 5,051,000
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2022 30,835 5,841,382
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2023 5,765 1,023,979
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2024 72,045 11,998,374
Massachusetts Industrial Finance Agency, Tunnel Rev
(Massachusetts Turnpike), 9s, 2020 11,170 13,598,917
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2001 9,100 6,472,557
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2005 1,500 808,830
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2007 4,000 1,858,120
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2008 5,400 2,338,308
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2011 13,400 4,699,380
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2028 13,450 1,259,055
West Virginia Parkways, Economic Development & Tourism
Authority, FGIC, RIBS, 7.408s, 2019 1,200 1,238,556
------------
$ 91,705,119
- -------------------------------------------------------------------------------------------
Airport and Port Revenue - 9.7%
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 $ 2,720 $ 2,995,210
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.5s, 2018 4,500 5,007,735
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 6,070 6,928,480
Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 9s, 2019 9,120 9,625,886
Dallas-Fort Worth, TX, International Airport Facility
Improvement Corp. (American Airlines), 6s, 2014 2,000 1,994,760
</TABLE>
13
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Airport and Port Revenue - continued
Dallas-Fort Worth, TX, International Airport Facility
Improvement Corp. (Delta Airlines), 7.625s, 2021 $ 4,500 $ 4,854,915
Denver, CO, City & County Airport Rev., 8.875s, 2012 5,000 5,894,450
Denver, CO, City & County Airport Rev., 0s, 2015 1,725 176,277
Denver, CO, City & County Airport Rev., 7.75s, 2021 2,050 2,296,308
Denver, CO, City & County Airport Rev., 8.5s, 2023 2,950 3,360,198
Denver, CO, City & County Airport Rev., 8.75s, 2023 5,770 6,826,949
Denver, CO, City & County Airport Rev., 8s, 2025 1,140 1,274,850
Denver, CO, City & County Airport Rev., 6.875s, 2032 7,130 7,357,661
Hillsborough County, FL, Aviation Authority Rev
(US Air), 8.6s, 2022 4,255 4,686,074
Indianapolis, IN, Airport Authority Rev., 6.5s, 2031 5,000 5,090,050
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 16,570 17,856,826
Tulsa, OK, Municipal Airport Trust Rev.,
7.375s, 2020 4,000 4,254,480
Tulsa, OK, Municipal Airport Trust Rev., 7.6s, 2030 14,210 15,248,041
------------
$105,729,150
- -------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.3%
Denver, CO, Urban Renewal Authority, Tax Increment Rev.
(Downtown Denver), 7.25s, 2017 $ 1,250 $ 1,348,288
Denver, CO, Urban Renewal Authority, Tax Increment Rev.
(Musicland), 8.5s, 2017 950 915,923
Denver, CO, Urban Renewal Authority, Tax Increment Rev.,
(Downtown Denver), 8.5s, 2013 1,415 1,367,668
------------
$ 3,631,879
- -------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 13.7%
Baltimore County, MD, Pollution Control
(Bethlehem Steel), 7.55s, 2017 $ 1,000 $ 1,058,430
Burns Harbor, IN, Solid Waste Disposal Facilities Rev.
(Bethlehem Steel), 8s, 2024 10,455 11,296,732
Butler, AL, Industrial Development Rev., 8s, 2028 4,500 5,103,135
Cambria County, PA, Industrial Development Auth., Pollution
Control Rev. (Pennsylvania Electric), 7.5s, 2015 2,950 3,096,291
Courtland, AL, Industrial Development Board,
Solid Waste Disposal Rev., 6.5s, 2025 4,000 4,127,880
Courtland, AL, Industrial Development Board,
Solid Waste Disposal Rev., 6.375s, 2029 7,500 7,633,350
DeQueen, AZ, Industrial Development Board
(Weyerhaeuser Co.), 9s, 2006 1,000 1,023,300
East Chicago Industrial Pollution Control Rev.
(Inland Steel Co. Project), 6.8s, 2013 6,000 6,070,920
Eastern Band Cherokee Indian, NC
(Carolina Mirror Co.), 10.25s, 2009+ 3,390 3,541,872
Eastern Band Cherokee Indian Community, NC
(Carolina Mirror Co.), 11s, 2012+ 950 996,484
Hernando County, FL, Industrial Development Rev.
(Crushed Stone Co.), 8.5s, 2014 8,325 9,211,613
Hodge Village, LA, Utilities Rev. (Stone Container
Corp.), 9s, 2010 6,800 7,598,388
</TABLE>
14
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Industrial Revenue (Corporate Guarantee) - continued
Hunt County, TX, Industrial Development Rev
(Household Manufacturing), 10.236s, 2003 $ 6,000 $ 5,998,380
Lawrenceburg, TN, Industrial Development Board
(Tridon, Inc.), 9.62s, 2006 2,800 2,916,256
Maine Finance Authority (Bowater, Inc.), 7.75s, 2022 8,500 9,398,790
Massachusetts Industrial Finance Agency,
Solid Waste Disposal Rev. (Molten Metal
Technology Project), 8.25s, 2014 4,000 4,259,040
McMinn County, TN, Industrial Development Board
(Bowater, Inc.), 7.4s, 2022 7,000 7,609,000
Mesa County, CO (Joy Technologies), 8.5s, 2006 1,350 1,457,879
Perry County, KY, Solid Waste (T.J. International),
7s, 2024 11,000 11,413,490
Philadelphia, PA, Authority for Industrial
Development Rev., 7.75s, 2017 2,000 2,058,200
Port of New Orleans, LA (Avondale Industries),
7.5s, 2013 2,000 2,125,220
Port of New Orleans, LA, 8.5s, 2014 22,550 25,438,430
Sweetwater County, WY, Solid Waste Disposal Rev.,
6.9s, 2024 3,000 3,146,250
Sweetwater County, WY, Solid Waste Disposal Rev.,
7s, 2024 2,000 2,110,720
Valdez, AK, Marine, 5.65s, 2028 5,000 4,957,450
Walton, GA, Industrial Development Authority
(Ultima Rubber Products, Inc.), 10s, 2010 4,550 4,917,367
------------
$148,564,867
- -------------------------------------------------------------------------------------------
Universities - 0.5%
Massachusetts Industrial Finance Agency
(Curry College), 8s, 2014 $ 1,500 $ 1,549,635
Massachusetts Industrial Finance Agency
(Emerson College), 8.9s, 2018 3,000 3,382,950
------------
$ 4,932,585
- -------------------------------------------------------------------------------------------
Miscellaneous Revenue - 6.2%
Brush, CO, Industrial Development Rev.
(Training Centers International), 12s, 2015 $ 4,679 $ 5,369,573
Brush, CO, Industrial Development Rev.
(Training Centers International), "B", 12s, 2015 4,401 5,050,543
Danville, VA, Industrial Development Authority
(Piedmont Mall), 2.75s, 2017 8,280 8,464,975
District of Columbia (National Public Radio), 7.7s, 2023 3,500 3,705,940
Martha's Vineyard, MA, Land Bank, 8.125s, 2011 2,900 3,027,919
Massachusetts Health & Education Facilities Authority
(Learning Center for Deaf Children), 9.25s, 2014 1,000 1,079,980
Michigan Strategic Fund Ltd. Obligation Rev.
(Blue Water Fiber), 8s, 2012 2,000 1,928,620
Michigan Strategic Fund Ltd. Obligation Rev.
(Great Lakes Fibre Project), 10.25s, 2016 18,380 18,934,892
Pennsylvania Convention, 6.75s, 2019 5,370 5,764,051
Retema, TX, Special Facilities Rev.
(Retema Park Racetrack Project), 8.75s, 2018 10,000 3,500,000
St. Louis County, MO, Industrial Development Authority
(Eagle Golf Enterprises, Inc.), 10s, 2005 2,200 2,472,624
St. Louis County, MO, Industrial Development Authority
(Kiel Center Arena), 7.875s, 2024 1,000 1,079,900
</TABLE>
15
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Miscellaneous Revenue - continued
Telluride Gondola Transit Co. (Colorado Real Estate
Transfer Assessment Rev.), 11.5s, 2012 3,655 4,449,195
Telluride Gondola Transit Co. (Colorado Real Estate
Transfer Assessment Rev.), 9s, 2016 $ 2,550 $ 2,548,470
--------------
$ 67,376,682
- -------------------------------------------------------------------------------------------
Special Assessment District - 0.2%
Indianapolis, IN, Public Improvement Bond,
6.5s, 2022 $ 2,000 $ 2,037,160
- -------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,004,861,049) $1,073,159,250
Floating Rate Demand Notes - 0.2%
- -------------------------------------------------------------------------------------------
Charleston County, SC, Industrial Rev
(Massey Coal), 3.4s, due 2007 $ 2,000 $ 2,000,000
Uinta County, WY, Pollution Control Rev
(Chevron), 3.4s, due 2020 600 600,000
--------------
Total Floating Rate Demand Notes, at Identified Cost $ 2,600,000
- -------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,007,461,049) $1,075,759,250
Other Assets, Less Liabilities - 1.0% 11,079,781
- -------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,086,839,031
- -------------------------------------------------------------------------------------------
<FN>
+ Restricted security.
++ Security accruing partial interest - in default.
* Non-income producing security - in default.
+++ Security valued by or at the direction of the Trustees.
</FN>
</TABLE>
See notes to financial statements
16
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
================================================================================
January 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,007,461,049) $1,075,759,250
Cash 738,588
Receivable for Fund shares sold 3,613,809
Receivable for investments sold 1,344,697
Interest receivable 15,410,810
Other assets 13,097
--------------
Total assets $1,096,880,251
--------------
Liabilities:
Payable for Fund shares reacquired $ 1,201,699
Payable for investments purchased 5,159,564
Payable to affiliates -
Management fee 19,426
Distribution fee 7,354
Shareholder servicing agent fee 4,176
Accrued expenses and other liabilities 3,649,001
--------------
Total liabilities $ 10,041,220
--------------
Net assets $1,086,839,031
==============
Net assets consist of:
Paid-in capital $1,124,411,855
Unrealized appreciation on investments 68,298,201
Accumulated net realized loss on investments (108,876,891)
Accumulated undistributed net investment income 3,005,866
--------------
Total $1,086,839,031
==============
Shares of beneficial interest outstanding 119,185,466
==============
Class A shares:
Net asset value and redemption price per share
(net assets of $1,009,030,818 / 110,653,810
shares of beneficial interest outstanding) $9.12
=====
Offering price per share (100/95.25 of
net asset value per share) $9.57
=====
Class B shares:
Net asset value and redemption price per share
(net assets of $77,808,213 / 8,531,656 shares
of beneficial interest outstanding) $9.12
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
17
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
================================================================================
Year Ended January 31, 1996
- --------------------------------------------------------------------------------
Net investment income:
Interest income $ 81,329,990
------------
Expenses -
Management fee $ 6,996,766
Trustees' compensation 63,313
Shareholder servicing agent fee (Class A) 1,320,561
Shareholder servicing agent fee (Class B) 149,788
Distribution and service fee (Class B) 615,735
Workout expenditures 280,647
Custodian fees 394,572
Miscellaneous 273,836
Legal fees 106,774
Postage 106,187
Printing 68,073
Auditing fees 53,184
------------
Total expenses $ 10,429,436
Fees paid indirectly (144,741)
------------
Net expenses $ 10,284,695
------------
Net investment income $ 71,045,295
------------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) -
Investment transactions $(24,859,595)
Change in unrealized appreciation -
Investments 88,864,128
------------
Net realized and unrealized gain on investments $ 64,004,533
------------
Increase in net assets from operations $135,049,828
============
See notes to financial statements
18
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
===========================================================================================
Year Ended January 31, 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 71,045,295 $ 66,441,830
Net realized loss on investments (24,859,595) (34,044,867)
Net unrealized gain (loss) on investments 88,864,128 (41,635,823)
-------------- ------------
Increase (decrease) in net assets from operations $ 135,049,828 $ (9,238,860)
-------------- ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (69,946,556) $(66,774,251)
From net investment income (Class B) (4,150,972) (1,978,622)
-------------- ------------
Total distributions declared to shareholders $ (74,097,528) $(68,752,873)
-------------- ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 158,313,624 $345,765,914
Net asset value of shares issued to shareholders
in reinvestment of distributions 27,605,848 24,997,370
Cost of shares reacquired (135,750,588) (127,012,254)
-------------- ------------
Increase in net assets from Fund
share transaction $ 50,168,884 $243,751,030
-------------- ------------
Total increase in net assets $ 111,121,184 $165,759,297
Net Assets:
At beginning of year 975,717,847 809,958,550
-------------- ------------
At end of year (including undistributed
net investment income of $3,005,866
and $1,098,869, respectively) $1,086,839,031 $975,717,847
-------------- ------------
</TABLE>
See notes to financial statements
19
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
====================================================================================================================================
Year Ended January 31, 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45
--------- -------- -------- -------- --------- --------
Income from investment operations # -
Net investment income $ 0.61 $ 0.64 $ 0.77 $ 0.73 $ 0.73 $ 0.74
Net realized and unrealized gain
(loss) on investments 0.59 (0.75) 0.05 0.06 0.17 (0.32)
--------- -------- -------- -------- --------- --------
Total from investment operations $ 1.20 $ (0.11) $ 0.82 $ 0.79 $ 0.90 $ 0.42
--------- -------- -------- -------- --------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.68) $ (0.67) $ (0.70) $ (0.75) $ (0.77) $ (0.78)
--------- -------- -------- -------- --------- --------
Total distributions declared to shareholders $ (0.68) $ (0.67) $ (0.70) $ (0.75) $ (0.77) $ (0.78)
--------- -------- -------- -------- --------- --------
Net asset value - end of period $ 9.12 $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09
--------- -------- -------- -------- --------- --------
Total return++ 13.92% (1.04)% 9.19% 9.02% 10.34% 4.65%
Ratios (to average daily net assets)/Supplemental data:
Expenses## 0.93% 1.04% 1.10% 1.00% 1.03% 1.05%
Net investment income 6.83% 7.27% 7.15% 7.95% 7.96% 8.17%
Portfolio turnover 20% 32% 18% 10% 21% 41%
Net assets at end of period
(000 omitted) $1,009,031 $920,043 $809,957 $731,968 $648,043 $638,185
<FN>
# Per share data for the periods subsequent to January 31, 1995 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to October
1, 1989). If the charge had been included, the results would have been lower.
</FN>
</TABLE>
See notes to financial statements
20
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
====================================================================================================================================
Year Ended January 31, 1990 1989 1988 1987 1996 1995 1994*
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.55 $ 9.68 $ 10.38 $ 10.49 $ 8.60 $ 9.38 $ 9.40
-------- -------- -------- -------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.85 $ 0.88 $ 0.84 $ 0.99 $ 0.52 $ 0.57 $ 0.32
Net realized and unrealized
gain (loss) on investments (0.09) (0.12) (0.67) (0.01) 0.59 (0.78) (0.14)
-------- -------- -------- -------- ------- ------- -------
Total from investment operations $ 0.76 $ 0.76 $ 0.17 $ 0.98 $ 1.11 $ (0.21) $ 0.18
-------- -------- -------- -------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.81) $ (0.82) $ (0.84) $ (1.01) $ (0.59) $ (0.57) $ (0.20)
From net realized gain on investments (0.04) (0.07) (0.03) (0.08) -- -- --
From paid-in capital (0.01) -- -- -- -- --
-------- -------- -------- -------- ------- ------- -------
Total distributions
declared to shareholders $ (0.86) $ (0.89) $ (0.87) $ (1.09 $ (0.59) $ (0.57) $ (0.20)
-------- -------- -------- -------- ------- ------- -------
Net asset value - end of period $ 9.45 $ 9.55 $ 9.68 $ 10.38 $ 9.12 $ 8.60 $ 9.38
-------- -------- -------- -------- ------- ------- -------
Total return++ 8.24% 8.32% 1.87% 10.00% 12.78% (2.13%) 1.89%
Ratios (to average daily net assets)/Supplemental data:
Expenses## 1.02% 0.65% 1.03% 1.00% 1.91% 2.10% 2.04%+
Net investment income 8.90% 9.27% 8.54% 9.54% 5.84% 6.32% 5.43%+
Portfolio turnover 21% 23% 16% 9% 20% 32% 18%
Net assets at end of period
(000 omitted) $485,037 $325,044 $349,655 $442,036 $77,808 $55,675 $ 1
<FN>
* For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
# Per share data for the periods subsequent to January 31, 1995 is based on average shares outstanding.
+ Annualized.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to October
1, 1989). If the charge had been included, the results would have been lower.
</FN>
</TABLE>
See notes to financial statements
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Municipal High Income Fund (the Fund) is a non-diversified series of MFS
Series Trust III (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex-interest date
in an amount equal to the value of the security on such date.
The Fund may invest up to 100% of its portfolio in high-yield municipal
securities rated below investment grade. Investments in high-yield securities
involve greater degrees of credit and market risk than investments in
higher-rated securities, and tend to be more sensitive to economic conditions.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring,
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
incurred to protect or enhance the value of high-yield debt securities, are
reported as an addition to the cost basis of the security. Costs that are
incurred to negotiate the terms or conditions of capital infusions or that are
expected to result in a plan of reorganization are reported as realized losses.
Ongoing costs incurred to protect or enhance an investment, or costs incurred to
pursue other claims or legal actions, are reported as operating expenses.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return annually
using tax accounting methods required under provisions of the Code which may
differ from generally accepted accounting principles, the basis on which these
financial statements are prepared. Accordingly, the amount of net investment
income and net realized gain reported on these financial statements may differ
from that reported on the Fund's tax return and, consequently, the character of
distributions to shareholders reported in the financial highlights may differ
from that reported to shareholders on Form 1099-DIV. Accumulated net realized
loss on investments is different for tax purposes because of deferred
recognition of tax losses occurring after October 31 of the current fiscal year.
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax pur-poses because the Fund intends to meet certain requirements of
the Code applicable to regulated investment companies, which will enable the
Fund to pay exempt-interest dividends. The portion of such interest, if any,
earned on private activity bonds issued after August 7, 1986 may be considered a
tax-preference item to shareholders. Distributions to shareholders are recorded
on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year January 31, 1996, accumulated undistributed net
investment income was increased by $4,959,230, accumulated net realized loss was
increased by $4,852,997, and paid in capital was decreased by $106,233, due to
differences between book and tax accounting for income recognition on certain
bonds and differences in the cost of securities. This change had no effect on
the net assets or net asset value per share.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
At January 31, 1996, the Fund, for federal income tax purposes, had a capital
loss carryforward of ($99,442,998), which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on January 31, 1998 ($1,041,407), January 31, 1999 ($2,433,909),
January 31, 2000 ($4,786,449), January 31, 2001 ($5,199,093), January 31, 2002
($28,166,887), and January 31, 2003 ($27,178,219), and January 31, 2004
($30,637,304).
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A
and Class B shares. Class B shares were first offered to the public on September
7, 1993. The two classes of shares differ in their respective shareholder
servicing agent, distribution and service fees. Shareholders of each class also
bear certain expenses that pertain only to that particular class. All
shareholders bear the common expenses of the Fund pro rata based on average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses, including distribution and shareholder
service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.30% of
average daily net assets and 4.75% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers and directors of MFS, MFS Fund Distributors, Inc. (MFD)
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $17,303 for the year ended
January 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$670,957 for the year ended January 31, 1996, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted a distribution
plan relating solely to Class B shares pursuant to Rule 12b-1 of the Investment
Company Act of 1940 as follows:
The Class B distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B shares. The service fee
is not charged on Class B shares held over one year. MFD will pay to securities
dealers that enter into a sales agreement with MFD, all or a portion of the
service fee attributable to Class B shares. The service fee is intended to be
additional consideration for services rendered by the dealer with respect to
Class B shares. Fees incurred under the distribution plan during the year ended
January 31, 1995 were 1.00% of average daily net assets attributable to Class B
shares on an annualized basis.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within 12 months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended January 31, 1996 were
$61,548 for Class A shares and $196,890 for Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee for Class A shares
is calculated at an effective annual rate of 0.15% for the first $500 million
and 0.12% for the next $500 million of the average daily net assets of the Fund.
The fee for Class B shares is calculated at an effective annual rate of 0.22%
for the first $500 million and 0.18% for the next $500 million of the average
daily net assets of the Fund.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $221,439,352 and $207,912,353, respectively. The cost and unrealized
appreciation or depreciation in value of the investments owned by the Fund, as
computed on a federal income tax basis, are as follows:
Aggregate cost $ 1,007,463,642)
===============
Gross unrealized appreciation $ 90,033,022)
Gross unrealized depreciation (21,737,414)
---------------
Net unrealized appreciation $ 68,295,608)
===============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares 1996 1995
---------------------------- ----------------------------
Year Ended January 31, Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 15,092,575 $ 134,162,658 32,283,057 $ 286,032,399
Shares issued to shareholders in
reinvestment of distributions 2,921,213 25,867,385 2,760,128 24,132,344
Shares reacquired (14,380,028) (128,112,173) (14,365,883) (123,961,674)
----------- ------------ ----------- -------------
Net increase 3,633,760 $ 31,917,870 20,677,302 $ 186,203,069
----------- ------------ ----------- -------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Class B Shares 1996 1995
---------------------------- ----------------------------
Year Ended January 31, Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 2,715,689 $ 24,150,966 6,732,579 $ 59,733,515
Shares issued to shareholders in
reinvestment of distributions 196,030 1,738,463 100,403 865,026
Shares reacquired (856,621) (7,638,415) (356,549) (3,050,580)
--------- ------------ --------- -------------
Net increase 2,055,098 $ 18,251,014 6,476,433 $ 57,547,961
========= ============= ========= =============
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $350 million, collectively.
Borrowings may be made to temporarily finance the acquisition of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended January 31, 1996 was $13,646.
(7) Restricted Securities
The Fund may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At January 31, 1996,
the Fund owned the following restricted securities (constituting 0.74% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees.
<TABLE>
<CAPTION>
Description Date of Acquisition Par Amount Cost Value
=========================================================================================
<S> <C> <C> <C> <C> <C>
Eastern Band Cherokee
Indian Community, NC
(Carolina Mirror Co.),
10.25s, 2009 12/21/93 $3,390,000 $3,497,779 $3,541,872
Eastern Band Cherokee
Indian Community, NC
(Carolina Mirror Co.),
11s, 2012 9/19/86 $ 950,000 $ 862,500 $ 996,484
Hannibal, MO, Industrial
Development Authority
(Hannibal Regional Health
Care System, Inc.),
9.5s, 2022 3/23/92 $3,000,000 $2,970,840 $3,522,840
----------
$8,061,196
==========
</TABLE>
26
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Trustees of MFS Series Trust III and Shareholders of
MFS Municipal High Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Municipal High Income Fund (one of the portfolios constituting the MFS Series
Trust III), including the schedule of portfolio investments, as of January 31,
1996, and the related statement of operations for the year then ended and the
statement of changes in net assets and financial highlights for each of the two
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial statements of MFS Municipal High Income Fund
for the year ended January 31, 1994, and the financial highlights for each of
the eight years in the period ended January 31, 1994 for Class A shares, and for
the period September 7, 1993 (commencement of operations) to January 31, 1994
for Class B shares, were audited by other auditors whose report dated March 16,
1994 expressed an unqualified opinion on those statements and financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1996, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Municipal High Income Fund at January 31, 1996, the results of its operations
for the year then ended and the changes in its net assets and financial
highlights for each of the two years in the period then ended, in conformity
with generally accepted accounting principles.
[Signature of Ernst & Young LLP]
Boston, Massachusetts
March 8, 1996
--------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
27
<PAGE>
MFS INVESTMENT OPPORTUNITIES
MUTUAL FUNDS
The MFS Family of Funds, shown on the facing page, falls into the eight general
categories below. All offer full-time professional management, a diversified
portfolio, and a wide array of shareholder services.
STOCK FUNDS seek growth of capital rather than income through investments in
stocks.
STOCK AND BOND FUNDS seek current income and growth of capital through
investments in both stocks and bonds.
BOND FUNDS seek current income through investments in debt securities.
WORLD FUNDS seek stock, balanced, and bond fund objectives through investments
in U.S. and foreign stocks and bonds.
LIMITED-MATURITY FUNDS seek current income and preservation of capital through
investments in debt securities with remaining maturities of five years or less.
NATIONAL TAX-FREE BOND FUNDS seek current income exempt from federal income tax
through investments in debt securities issued by states and municipalities.[1]
STATE TAX-FREE BOND FUNDS seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state and
its municipalities.[1]
MONEY MARKET FUNDS seek preservation of capital and current income through
investments in short-term debt securities.[2]
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information for
literature[3] on MFS products and services: 1-800-637-2929, from 9 a.m. to 5
p.m. Eastern time any business day (leave a message anytime).
[1] A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
[2] Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the fund will be able to maintain
a stable net asset value.
[3] Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
28
<PAGE>
THE MFS FAMILY OF FUNDS [Registration Mark]
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
STOCK
================================================================================
Massachusetts Investors Trust
- --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Capital Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Emerging Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Gold & Natural Resources Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Growth Opportunities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Managed Sectors Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] OTC Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Research Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Value Fund
- --------------------------------------------------------------------------------
STOCK AND BOND
================================================================================
MFS [Registration Mark] Total Return Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Utilities Fund
- --------------------------------------------------------------------------------
BOND
================================================================================
MFS [Registration Mark] Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Mortgage Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Securities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] High Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Intermediate Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Strategic Income Fund
- --------------------------------------------------------------------------------
LIMITED MATURITY BOND
================================================================================
MFS [Registration Mark] Government Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Limited Maturity Fund
- --------------------------------------------------------------------------------
WORLD
================================================================================
MFS [Registration Mark]/Foreign & Colonial Emerging Market Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth and Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Asset Allocation Fund [Service Mark]
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Governments Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Total Return Fund
- --------------------------------------------------------------------------------
NATIONAL TAX-FREE BOND
================================================================================
MFS [Registration Mark] Municipal Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal High Income Fund
(closed to new investors)
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Income Fund
- --------------------------------------------------------------------------------
STATE TAX-FREE BOND
================================================================================
Alabama, Arkansas, California, Florida, Georgia, Louisiana, Maryland,
Massachusetts, Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
- --------------------------------------------------------------------------------
MONEY MARKET
================================================================================
MFS [Registration Mark] Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Money Market Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Money Market Fund
- --------------------------------------------------------------------------------
<PAGE>
MFS [Registration Mark] Municipal [Dalbar Logo] Bulk Rate
High Income Fund U.S. Postage
PAID
500 Boylston Street Permit #55638
Boston, MA 02116 Boston, MA
[MFS LOGO]
The first name in Mutual Funds
MMH-2 4/96 45M 25/225
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
MFS High Income Fund
(a) Financial Statements Included in Part A:
For each of the years in the ten-year period
ended January 31, 1996:
Financial Highlights
Financial Statements Included in Part B:
At January 31, 1996:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the year ended January 31, 1996:
Statement of Operations*
For the two years ended January 31, 1996:
Statement of Changes in Net Assets*
MFS Municipal High Income Fund
(a) Financial Statements Included in Part A:
For each of the years in the ten-year period
ended January 31, 1996:
Financial Highlights
Financial Statements Included in Part B:
At January 31, 1996:
Statement of Assets and Liabilities**
Portfolio of Investments**
For the year ended January 31, 1996:
Statement of Operations**
For the two years ended January 31, 1996:
Statement of Changes in Net Assets**
- -----------------------------
* Incorporated herein by reference to the Fund's Annual Report to
shareholders dated January 31, 1996, filed via EDGAR with the SEC on April
5, 1996.
** Incorporated herein by reference to the Fund's Annual Report to
shareholders dated January 31, 1996, filed via EDGAR with the SEC on April
16, 1996.
<PAGE>
(b) Exhibits:
1 Amended and Restated Declaration of Trust, dated February
17, 1995. (1)
2 Amended and Restated By-Laws, dated December 21, 1994. (1)
3 Not Applicable.
4 Form of Share Certificate for Class A, Class B and Class C
Shares. (3)
5 (a) Investment Advisory Agreement for MFS High Income
Fund, dated May 20, 1987. (1)
(b) Investment Advisory Agreement for MFS Municipal High
Income Fund dated September 1, 1993. (6)
(c) Amendment to Investment Advisory Agreement for MFS
Municipal High Income Fund, dated August 1, 1995; filed
herewith.
6 (a) Dealer Agreement between MFS Fund Distributors, Inc.
("MFD"), and a dealer dated December 28, 1994 and the
Mutual Fund Agreement between MFD and a bank or NASD
affiliate, dated December 28, 1994. (2)
(b) Distribution Agreement, dated January 1, 1995. (1)
7 Retirement Plan for Non-Interested Person Trustees, dated
February 1, 1991. (6)
8 (a) Custodian Agreement, dated May 24, 1988. (6)
(b) Amendment to Custodian Agreement, dated May 24, 1988. (6)
(c) Amendment to Custodian Agreement, dated October 1, 1989.
(6)
(d) Amendment to Custodian Agreement, dated September 17,
1991. (6)
9 (a) Shareholder Servicing Agent Agreement, dated August 1,
1985. (6)
(b) Amendment to the Shareholder Servicing Agreement dated
December 28, 1993. (6)
(c) Exchange Privilege Agreement, dated February 8, 1989 as
amended through September 1, 1995. (7)
(d) Loan Agreement by and among the Banks named therein, the
MFS Funds named therein, and The First National Bank of
Boston, dated as of February 21, 1995. (4)
(e) Dividend Disbursing Agency Agreement, dated February 1,
1986. (3)
10 Consent and Opinion of Counsel filed with Registrant's
Rule 24f-2 Notice for the fiscal year ended January 31,
1996 on March 22, 1996.
11 (a) Consent of Deloitte & Touche LLP - MFS High Income
Fund; filed herewith.
(b) Consent of Ernst & Young LLP - MFS Municipal High Income
Fund; filed herewith.
12 Not Applicable.
13 Not Applicable.
14 (a) Forms for Individual Retirement Account Disclosure
Statement as currently in effect. (5)
(b) Forms for MFS 403(b) Custodial Account Agreement as
currently in effect. (5)
(c) Forms for MFS Prototype Paired Defined Contribution Plans
and Trust Agreement as currently in effect. (5)
15 (a) Amended and Restated Distribution Plan for Class A
shares of MFS High Income Fund, dated December 21, 1994.
(1)
(b) Distribution Plan for Class B shares of MFS High Income
Fund, dated December 21, 1994. (1)
(c) Distribution Plan for Class C shares of MFS High Income
Fund, dated December 21, 1994. (1)
(d) Distribution Plan for Class B shares of MFS Municipal High
Income Fund, dated December 21, 1994. (1)
16 Schedule of Computation for Performance Quotations -
Yield, Distribution Rate, Total Rate of Return - MFS High
Income Fund; and Yield, Distribution Rate, Tax-Equivalent
Yield and Total Return - MFS Municipal High Income Fund.
(2)
17 Financial Data Schedules for each class of each series;
filed herewith.
18 Not Applicable.
Power of Attorney, dated September 21, 1994. (1)
- -----------------------------
(1) Incorporated by reference to the Registrant's Post-Effective Amendment
No. 20 filed with the SEC via EDGAR on May 31, 1995.
(2) Incorporated by reference to MFS Municipal Series Trust (File Nos.
2-92915 and 811-4096) Post-Effective Amendment No. 26 filed with the
SEC via EDGAR on February 22, 1995.
(3) Incorporated by reference to MFS Municipal Series Trust (File Nos.
2-92915 and 811-4096) Post-Effective Amendment No. 28 filed with the
SEC via EDGAR on July 28, 1995.
(4) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS
Municipal Income Trust (File No. 811-4841) filed with the SEC via EDGAR
on February 28, 1995.
(5) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 32 filed with the SEC via EDGAR
on August 28, 1995.
(6) Incorporated by reference to the Registrant's Post-Effective Amendment
No. 21 filed with the SEC via EDGAR on October 13, 1995.
(7) Incorporated by reference to MFS Series Trust X (File Nos. 33-1657 and
811-4492) Post-Effective Amendment No. 13 filed with the SEC via EDGAR
on November 28, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not Applicable.
Item 26. Number of Holders of Securities
For MFS High Income Fund
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 32,005 (without par value)
(as of May 3, 1996.)
Class B Shares of Beneficial Interest 13,092
(without par value) (as of May 3, 1996.)
Class C Shares of Beneficial Interest 610
(without par value) (as of May 3, 1996.)
For MFS Municipal High Income Fund
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 29,190
(without par value) (as of May 3, 1996.)
Class B Shares of Beneficial Interest 2,500
(without par value) (as of May 3, 1996.)
Item 27. Indemnification
Reference is hereby made to (a) Article V of Registrant's Amended and
Restated Declaration of Trust, incorporated by reference to Post-Effective
Amendment No. 20, filed with the SEC on May 31, 1995 and (b) Section 9 of the
Shareholder Servicing Agent Agreement, incorporated by reference to Registrant's
Post-Effective Amendment No. 21 filed with the SEC via EDGAR on October 13,
1995.
The Trustees and Officers of the Registrant and the personnel of the
Registrant's investment adviser and principal underwriter are insured under an
errors and omissions liability insurance policy. The Registrant and its officers
are also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940.
Item 28. Business and Other Connections of Investment Adviser
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: Massachusetts Investors Trust, Massachusetts
Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS Government
Securities Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which
has eight series: MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World
Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research Growth and
Income Fund, MFS Core Growth Fund, MFS Equity Income Fund and MFS Special
Opportunities Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold
& Natural Resources Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series:
MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which has
three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has
three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has four series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign
& Colonial International Growth Fund and MFS/Foreign & Colonial International
Growth and Income Fund), and MFS Municipal Series Trust (which has 16 series:
MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS
California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST") (which has two series). The principal business address of
each of the aforementioned Funds is 500 Boylston Street, Boston, Massachusetts
02116.
In addition, MFS serves as investment adviser to the following
closed-end Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), Sun Growth Variable Annuity Funds, Inc. ("SGVAF"), Money Market
Variable Account, High Yield Variable Account, Capital Appreciation Variable
Account, Government Securities Variable Account, World Governments Variable
Account, Total Return Variable Account and Managed Sectors Variable Account. The
principal business address of each is One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of the Republic of Ireland and a subsidiary of MFS, whose
principal business address is 41-45 St. Stephen's Green, Dublin 2, Ireland,
serves as investment adviser to and distributor for MFS International Fund
(which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS
International Funds-U.S. Emerging Growth Fund, MFS International Funds-Global
Governments Fund, MFS International Funds - U.S. Dollar Reserve Fund and MFS
International Funds-Charter Income Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund and MFS Meridian Research Fund
(collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is
organized as an exempt company under the laws of the Cayman Islands. The
principal business address of each of the MFS Meridian Funds is P.O. Box 309,
Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of
MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT, MVI and UST.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary of MFS,
provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., and
Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a Senior
Vice President, General Counsel and an Assistant Secretary, Joseph W. Dello
Russo is a Senior Vice President, Chief Financial Officer and Treasurer, Robert
T. Burns is a Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Assistant
Treasurer.
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Series Trust I
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust X
MFS Government Limited Maturity Fund
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of
MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.
MFS Series Trust II
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg,
Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Government Markets Income Trust
MFS Intermediate Income Trust
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin,
Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice President of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost is the Assistant Treasurer, and James R. Bordewick,
Jr., is the Assistant Secretary.
MFS Series Trust III
A. Keith Brodkin is the Chairman and President, James T. Swanson,
Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan and Daniel E. McManus, Assistant Vice Presidents of MFS, are
Assistant Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost is the Assistant Treasurer, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS Series Trust IV
MFS Series Trust IX
A. Keith Brodkin is the Chairman and President, Robert A. Dennis and
Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS Series Trust VII
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and
Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is
the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Series Trust VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames,
Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D. Laupheimer,
Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Municipal Series Trust
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter and
David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus,
Assistant Vice President of MFS, is an Assistant Vice President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Variable Insurance Trust
MFS Union Standard Trust
MFS Institutional Trust
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Municipal Income Trust
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS Multimarket Income Trust
MFS Charter Income Trust
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin,
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President
of MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is he Assistant
Secretary.
MFS Special Value Trust
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames,
Patricia A. Zlotin and Robert J. Manning are Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, and James O. Yost, is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
SGVAF
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and
Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is
the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS, is a
Senior Vice President, Stephen E. Cavan is a Director, Senior Vice President and
the Clerk, James R. Bordewick, Jr. is a Director, Vice President and an
Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo is
the Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott,
Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E. Cavan
is a Director and the Secretary, Ziad Malek is the President, James E. Russell
is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL Funds
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters are
Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS Meridian Funds
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott, Jeffrey L. Shames
and William F. Waters are Directors, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant
Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is a Senior
Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice
President of MFS, is the President, Stephen E. Cavan is the Secretary, Robert T.
Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer, and
Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery is
the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T.
Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice President
of MFS, is Vice Chairman and a Director, Janet A. Clifford is the Executive Vice
President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is
the Assistant Secretary.
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames, and
Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President and a
Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director and
a Director, George F. Bennett, Carol A. Corley, John A. Gee, Brianne Grady and
Kevin R. Parke are Senior Vice Presidents and Managing Directors, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer and
Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold D. Scott
is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer, Thomas
B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and Martin E.
Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive
Park, Wellesley Hills, Massachusetts
Director, Sun Life Insurance and Annuity
Company of New York, 67 Broad Street, New
York, New York
John R. Gardner President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150
King Street West, Toronto, Ontario, Canada
(Mr. Gardner is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil
is also an officer and/or Director of
various subsidiaries and affiliates of Sun
Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The
Boston Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
Item 29. Distributors
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal business
address of each of these persons is 500 Boylston Street, Boston, Massachusetts
02116.
(c) Not applicable.
Item 30. Location of Accounts and Records
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and Trust Company State Street South
(custodian) 5-West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of its latest annual report to shareholders upon
request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 28th day of May, 1996.
MFS SERIES TRUST III
By: JAMES R. BORDEWICK, JR.
--------------------------------
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below
by the following persons in the capacities indicated on May 28, 1996.
SIGNATURE TITLE
--------- -----
Chairman, President (Principal
A. KEITH BRODKIN* Executive Officer) and Trustee
- ------------------------------
A. Keith Brodkin
Treasurer (Principal Financial Officer
W. THOMAS LONDON* and Principal Accounting Officer)
- ------------------------------
W. Thomas London
RICHARD B. BAILEY* Trustee
- ------------------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
- ------------------------------
Peter G. Harwood
J. ATWOOD IVES* Trustee
- ------------------------------
J. Atwood Ives
LAWRENCE T. PERERA* Trustee
- ------------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- ------------------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- ------------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- ------------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- ------------------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- ------------------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- ------------------------------
David B. Stone
*By: JAMES R. BORDEWICK, JR.
--------------------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr.
on behalf of those indicated pursuant
to a Power of Attorney dated
September 21, 1994, incorporated by
reference to the Registrants
Post-Effective Amendment No. 20 filed
with the Securities and Exchange
Commission on May 31, 1995.
<PAGE>
MFS SERIES TRUST III
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
5 (c) Amendment to Investment Advisory
Agreement for MFS Municipal High
Income Fund, dated August 1, 1995.
11 (a) Consent of Deloitte & Touche LLP -
MFS High Income Fund.
(b) Consent of Ernst & Young LLP - MFS
Municipal High Income Fund.
17 Financial Data Schedules for each class
of each series.
<PAGE>
EXHIBIT NO. 99.5(c)
AMENDMENT TO INVESTMENT
ADVISORY AGREEMENT
AMENDMENT dated August 1, 1995 to the Investment Advisory Agreement dated
September 1, 1993 by and between MFS Series Trust III (the "Trust") on behalf of
MFS Municipal High Income Fund (the "Fund"), a series of the Trust, and
Massachusetts Financial Services Company, a Delaware corporation (the "Adviser")
(the "Agreement").
WITNESSETH
WHEREAS, the Trust on behalf of the Fund has entered into the Agreement with the
Adviser; and
WHEREAS, MFS has agreed to amend the Agreement as provided below;
NOW THEREFORE, in consideration of the mutual covenants and agreements of the
parties hereto as herein set forth, the parties covenant and agree as follows:
1. Amendment of the Agreement: The first sentence of Article 3 of the
Agreement is deleted and replaced in its entirety as follows:
"For the services to be rendered and the facilities to be
provided, the Fund shall pay to the Adviser an investment advisory
fee computed and paid monthly in an amount equal to the sum of
0.30% of the first $1.3 billion of the Fund's average daily net
asset value and 0.25% of the amount in excess of $1.3 billion plus
4.75% of the Fund's gross income (i.e., income other than from the
sale of securities), in each case on an annualized basis for the
Fund's then-current fiscal year."
2. Miscellaneous: Except as set forth in this Amendment, the Agreement
shall remain in full force and effect, without amendment or modification.
3. Limitation of Liability of the Trustees and Shareholders: A copy of
the Trust's Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts. The parties hereto acknowledge that the
obligations of or arising out of this instrument are not binding upon any of the
Trust's trustees, officers, employees, agents or shareholders individually, but
are binding solely upon the assets and property of the Trust in accordance with
its proportionate interest hereunder. If this instrument is executed by the
Trust on behalf of one or more series of the Trust, the parties hereto
acknowledge that the assets and liabilities of each series of the Trust are
separate and distinct and that the obligations of or arising out of this
instrument are binding solely upon the assets or property of the series on whose
behalf the Trust has executed this instrument. If the Trust has executed this
instrument on behalf of more than one series of the Trust, the parties hereto
also agree that the obligations of each series hereunder shall be several and
not joint, in accordance with its proportionate interest hereunder, and the
parties hereto agree not to proceed against any series for the obligations of
another series.
IN WITNESS WHEREOF, the parties have caused this Amendment to the Agreement to
be executed and delivered in the names and on their behalf by the undersigned,
therewith duly authorized, all as of the day and year first above written.
MFS SERIES TRUST III, on
behalf of MFS MUNICIPAL
HIGH INCOME FUND
By: A. KEITH BRODKIN
--------------------------
A. Keith Brodkin,
Chairman
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By: ARNOLD D. SCOTT
--------------------------
Arnold D. Scott, Senior
Executive Vice President
<PAGE>
EXHIBIT NO. 99.11(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 22 to Registration Statement No. 2-60491 of MFS High Income Fund
of our report dated March 1, 1996 appearing in the annual report to shareholders
for the year ended January 31, 1996, of MFS High Income Fund and to the
references to us under the headings "Condensed Financial Information" in the
Prospectus and "Independent Auditors and Financial Statements" in the Statement
of Additional Information, which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
May 24, 1996
<PAGE>
EXHIBIT NO. 99.11(b)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions
"Condensed Financial Information" in the Prospectus and "Independent Auditors
and Financial Statements" in the Statement of Additional Information and to the
incorporation by reference in this Post-Effective Amendment No. 22 to
Registration Statement No. 2-60491 on Form N-1A of our report dated March 8,
1996, on the financial statements and financial highlights of MFS Municipal High
Income Fund, included in the 1996 Annual Report to Shareholders.
ERNST & YOUNG LLP
---------------------------
Ernst & Young LLP
Boston, Massachusetts
May 24, 1996
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<ACCUMULATED-NII-CURRENT> 3005866
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 8876891
<ACCUM-APPREC-OR-DEPREC> 68298201
<NET-ASSETS> 1086839031
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 81329990
<OTHER-INCOME> 0
<EXPENSES-NET> 10284695
<NET-INVESTMENT-INCOME> 71045295
<REALIZED-GAINS-CURRENT> (24859595)
<APPREC-INCREASE-CURRENT> 88864128
<NET-CHANGE-FROM-OPS> 135049828
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 69946556
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15092575
<NUMBER-OF-SHARES-REDEEMED> 14380028
<SHARES-REINVESTED> 2921213
<NET-CHANGE-IN-ASSETS> 111121184
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (84017296)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6996766
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10429436
<AVERAGE-NET-ASSETS> 1049952524
<PER-SHARE-NAV-BEGIN> 8.60
<PER-SHARE-NII> 0.61
<PER-SHARE-GAIN-APPREC> 0.59
<PER-SHARE-DIVIDEND> 0.68
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.12
<EXPENSE-RATIO> 0.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF MFS SERIES MFS MUNICIPAL HIGH INCOME FUND CLASS B AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000225604
<NAME> MFS SERIES TRUST III
<SERIES>
<NUMBER> 022
<NAME> MFS MUNICIPAL HIGH INCOME FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 1007461049
<INVESTMENTS-AT-VALUE> 1075759250
<RECEIVABLES> 20369316
<ASSETS-OTHER> 13097
<OTHER-ITEMS-ASSETS> 738588
<TOTAL-ASSETS> 1096880251
<PAYABLE-FOR-SECURITIES> 5159564
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4881656
<TOTAL-LIABILITIES> 10041220
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1124411855
<SHARES-COMMON-STOCK> 8531656
<SHARES-COMMON-PRIOR> 6476558
<ACCUMULATED-NII-CURRENT> 3005866
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 8876891
<ACCUM-APPREC-OR-DEPREC> 68298201
<NET-ASSETS> 1086839031
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 81329990
<OTHER-INCOME> 0
<EXPENSES-NET> 10284695
<NET-INVESTMENT-INCOME> 71045295
<REALIZED-GAINS-CURRENT> (24859595)
<APPREC-INCREASE-CURRENT> 88864128
<NET-CHANGE-FROM-OPS> 135049828
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4150972
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2715689
<NUMBER-OF-SHARES-REDEEMED> 856621
<SHARES-REINVESTED> 196030
<NET-CHANGE-IN-ASSETS> 111121184
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (84017296)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6996766
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10429436
<AVERAGE-NET-ASSETS> 1049952524
<PER-SHARE-NAV-BEGIN> 8.60
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> 0.59
<PER-SHARE-DIVIDEND> 0.59
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.12
<EXPENSE-RATIO> 1.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
